India’s vanishing economy

India faces a terrible choice, says Sadanand Dhume in The Wall Street Journal. Most countries are grappling with a trade-off between “lives and livelihoods”, but in an economy where more than 80% of people live on less than $5.50 a day, lockdowns are proving an unaffordable luxury.

Prime Minister Narendra Modi imposed one of the world’s toughest lockdowns on 25 March. Curbs have been eased recently, yet infections have not peaked and a lack of testing hardly helps: as of 30 April New York state had tested more people for Covid-19 than the whole of India. 

Economic carnage

The economic data for April is “shocking”, writes Freya Beamish of Capital Economics. The services purchasing managers’ index (PMI) plunged to just 5.4 last month (readings below 50 imply contraction), a level that implies that the sector, worth half of GDP, “effectively vanished”. The nadir of China’s equivalent gauge was 26.5. GDP is set to fall 20% year-on-year in the second quarter.

Developed countries have served up massive fiscal support to cushion the blow of lockdowns, notes the Financial Times. Until this week India’s support package had amounted to a measly 1.1% of GDP. Some economists say India needs stimulus of at least 5% to mitigate the worst economic and social effects of the pandemic; this week, Modi promised them 10%. 

The figure has surprised investors, given that government debt has already reached a comparatively high 70% of GDP. This could “[put] India’s investment-grade sovereign credit rating on the line”, says Una Galani on Breakingviews. “In normal times,” that could unnerve global investors and prompt them to withdraw money from the economy. 

But India has a record of being able to embrace tough structural reforms, which bolster long-term growth, in a crisis – witness its embrace of market forces during the balance-of-payments drama of 1991. Modi’s “rare outright parliamentary majority” bodes well this time. There is plenty to do, says The Times of India. The Covid-19 lockdown has empowered bureaucrats, stoking fears of a return to the bad old days of the heavily regulated “licence raj”.

The torrid backdrop has wiped a quarter off the BSE Sensex index this year. The market still trades on a relatively elevated cyclically-adjusted price/earnings ratio of 18.2, but, as Craig Mellow notes in Barron’s, India is usually the priciest major emerging market and valuations have come down. 

The risk-tolerant think that this might be an opportunity to buy into the long-term growth of an economy where half of the population is under 25 at a comparative bargain. “Don’t count the country out.”