India’s drive for economic reform weakens

Investors feel that Prime Minister Modi’s government is neglecting economic reforms

published 5 February 2020

What has gone wrong in India? Not long ago it was the world’s fastest-growing major economy. But annual growth fell back to just 4.5% in the third quarter of last year, writes Sangeeta Khorana for Quartz. Official estimates predict the lowest growth for 11 years in the year to April 2020.

Stocks have yet to feel the gloom. India’s Nifty 50 index returned 12% in 2019, a year marked by optimism that the re-election of Prime Minister Narendra Modi would bring more economic reform. Down by 3.8% so far this year, the index has still outperformed other emerging markets laid low by the coronavirus.

A growth malaise

A weak banking and finance sector lie at the root of India’s growth malaise, says Khorana. Addled by bad debt and fraud, shaky financial institutions have provoked a credit crunch. That has weighed on consumer spending and businesses; investment is down from 34.4% of GDP in the 2012 financial year to around 28% this year. Unemployment hit a three-year high of 8.5% last October. New Delhi is trying to turn things around. Modi is lowering corporation tax from 30% to 22% and has cut red tape, with India climbing from 134th to 77th in the World Bank’s ease of doing business index since 2014.

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Yet the concern is that the newly re-elected administration is increasingly distracted, writes Milan Vaishnav in The Washington Post. The “darker truth” behind India’s economic woes is that reform is no longer “at the top of the government’s to-do list”. Intent on building a Hindu-centric state, ministers are devoting their attention to such contentious questions as the status of Jammu and Kashmir and a controversial new citizenship law. Further reform is being neglected.

Last week’s annual budget did little to revive growth prospects, adds Karan Deep Singh in The New York Times. Investors banking on a capital gains tax cut were disappointed. Modest changes to bank deposit insurance rules are not nearly enough to turn around the country’s ailing financial institutions. The newly announced measures are “unlikely to revive the economy much”, agrees The Economist. Even sensible ideas, such as a planned simplification of income tax, are “unimpressive on closer examination”.

Investors must pay dearly to buy into India’s slowing economy. On a price/earnings ratio of 27.5 the local market is more expensive than even the US. Other Asian markets offer better dividend yields than India’s 1.3%. “India’s future is fundamentally bright”, says Arvind Subramanian in the Financial Times. Cheap labour, “decent institutions” and “considerable scope for growth” are all long-term assets. Yet it will take some time to work through the current thicket of problems.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.