Amid the Latest Economic Downturn, is the Indian Dream Unraveling?

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Prime Minister Narendra Modi’s vision for India to become a $5 trillion economy by 2024 is in danger.

The current downturn — the third since the financial crisis — looks likely to undo that objective and extend further into the future as the world’s second-most populous country strives to bring large swathes of its population out of poverty.

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In a recent Stratfor report, India’s rollercoaster economy is said to be experiencing growth of just 6.1% in this financial year. Falling tax receipts are likely to mean the government will breach its 3.3% deficit target.

The report paints a picture of an economy unable to sustain strong growth for more than a few years at a time, saying this is the third downturn following periods in 2009 and 2014 which brought previous annual averages of 9.5% growth (2005-2008) to an abrupt end.

Both investment as a share of GDP (crucial for a developing country) and manufacturing growth (crucial for a young and rapidly rising labor force to find employment) have again fallen below target.

All of this comes despite the government’s much-heralded “Make in India” policy, which is designed to force firms to develop a domestic supply chain (thus creating investment, employment and technical knowhow).

The only measure that has remained down compared to previous periods is inflation, following two bumper harvests that depressed food costs. The flip side of that is farmers, who make up some two-thirds of the population, are experiencing depressed incomes, adding to weak GDP growth.

Bank lending is also suffering. The Reserve Bank of India is enforcing stricter rules on banks to realize their non-performing loans and close down firms, as opposed to the historical practice of indefinitely kicking the can down the road, which consumed valuable funds and perpetuated zombie companies.

The new policy makes sound economic sense, but in the short term is reducing banks’ ability to lend and is shining a light on the country’s increasingly shaky shadow banking sector.

A return to strong growth is unlikely in the short term; double-digit growth may be a thing of the past in a weaker global environment. Efforts to boost investment by reducing corporate tax rates from 30% to 22%, while admirable, have deprived the treasury of revenue but failed to stimulate the desired investment.

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For India’s technocrats, it must feel like they are the also-rans to China’s stellar growth engine.

However, maybe they should console themselves with the thought that while a centralized autocratic regime can achieve amazing rates of growth and market control, it has proved inconsistent with freedoms as Indians understand them; it is hard to see the Chinese model being popular among India’s pluralist democracy of 1.3 billion people.

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