What ails the Indian economy?

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The Indian economy grew at its slowest rate for three years in the April-June quarter and the growth has slowed for six consecutive quarters. Economic analyst Vivek Kaul explains why one of the world’s fastest growing economies is sputtering to a halt.

On Monday, Prime Minister Narendra Modi revived the India of the economic council, a body that had been abolished soon after the arrival to power in 2014.

India has seen slower economic growth since Mr Modi took over as prime minister in the back of the promises along with more jobs and a stronger economy.

For the period between April and June of 2017, the Indian GDP grew by just 5.7% (compared to 9.1% a year before).

Much of that 5.7% was due to the fact that the government spent more than it normally does. The non-government part of the GDP, which constitutes approximately 90% of the economy, grew by just 4.3%.

The industry as a whole grew by 1.6%, with the manufacturing and construction growth of 1.2% and 2%, respectively.

The last time the economy grew by less than 6% (5.3 per cent) was between January and March of 2014, when Manmohan Singh was the prime minister.

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We live in a world where any growth rate greater than 2% is considered good. But what is true for Western countries is not necessarily true for India.

India’s GDP needs to grow at a faster rate than the 7% for the country to continue to pull millions out of poverty.

“Even a small change in the rate of growth of per capita income makes a big difference to the eventual per capita income,” writes the economist Vijay Joshi in the India of the Long Journey – The Pursuit of Prosperity.

This is what economists call the “power of compound interest”.
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And how do you see things in India in the year 2040 to different rates of economic growth?

According to Joshi: “At a growth rate of 3% in a year, the per capita income would double, and reach the same level as China, the per capita income of today. At a growth rate of 6% per year, the per capita income would quadruple to a level of around those who enjoy Chile, Malaysia and Poland today.

“If the per capita income grew at a 9% per year, would increase by almost eight times, and India have a per capita income comparable to an average of high-income countries of today.”

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Agriculture, which accounts for about 15% of GDP, still employs half of the labour force of the country.

But exports between April and August of 2017 are lower than in 2013 and 2014.

There is also the India’s so-called demographic dividend – 12 million young Indians entering the workforce each year.

But given the lack of a good education, the majority of these young people need, low-skilled jobs, the construction and real estate industries can provide.

With both sectors growing at the rate they are, where are the jobs? The services sector continues to grow robustly, but still needs the support of industries such as construction.

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Even in those industries that have the potential to create many jobs, such as garment manufacturing, continue to operate on a small scale because of India’s complicated labor law.

A recent report, the Ease of Doing Business – A Survey of the companies of the States of India, published by the federal institute, found that 85% of the companies that operate in the garment sector employed less than eight workers.

In fact, 85% of India’s manufacturing companies employ less than 50 workers.

The government feels it has done enough to reform labour laws, and now it is the responsibility of the industry to set labor-intensive of businesses.

But as the data suggests, the Indian industry continues to favor capital-intensive, rather than labour-intensive methods of expansion.

As a result of all these factors, India has a huge underemployment.

The numbers of 2015-2016 suggest that only three out of every five people seeking a job during the year are able to find one.

The situation is worse in the rural areas of India, where only one of every two are correct.

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Demonetisation (a surprise to the government’s decision to cancel the 86% of the currency of India) has also made things worse – many of the companies that operate in the “cash only” informal sector, which creates many jobs, had to close.

And the Goods and Services Tax, a major reform that replaces numerous federal and state taxes with a single tax, has not helped.

The other big concern is that India is largely government owned public sector banks are in a mess. Seventeen of the 21 banks have a bad loan at a rate of 10% or more (as at 31 March).

Bad loans are loans in which the borrower’s repayment has been due for 90 days or more. A bank (Indian Overseas Bank) has a bad loan with a rate of 25%.

These bad loans are in large part the result of the granting of loans to the industry, where the total of the loan loss rate stood at 22.3%.
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The government has already pumped in close to 1,500 million rupees ($23bn; £17bn) as a capital since 2009 to keep these banks.

But with banks continuing to accumulate bad loans, they are going to need billions of extra capital to continue operating.

The federal government does not have that money, but it is still reluctant to privatize or even turn off some of these banks. A greater impact of the bad loans has been that the public sector banks are now reluctant to lend to the industry.

The Indian economy is undergoing many structural problems, and if long-term growth rate of 7-8% per year has to be sustained, these issues should be addressed on a war footing.