India’s drive for economic reform weakens

India's government is neglecting economic reform in favour of pushing nationalist policies

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.

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.

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
How to invest in Africa as it takes its place in the post-pandemic sun
Emerging markets

How to invest in Africa as it takes its place in the post-pandemic sun

The African Continental Free Trade Agreement has come into force. Favourable demographics, improving governance and a growing technology sector also b…
14 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021