Sun. Jan 26th, 2020

The Indian economy is suffering from a significant recession with no visible sign of relief

It is now official: the Indian economy is suffering from a significant recession and one that shows no visible sign of relief. The only surprise is that last quarter’s estimate of gross domestic product growth is not even lower than the 4.5% forecast.

After being re-elected, when the Narendra Modi-led government delivered its first budget, it expected growth of about 7% in 2019-20. A few months later, India’s Reserve Bank slashed that to 6.1%. It is difficult, now, to see how even that rate— relatively slow by the past standards of India — will be achieved. The story of what went wrong is hidden in the disaggregated numbers. Investment is collapsing. It rose by just 1% last quarter in real terms, after rising nearly 12% last year in the same quarter. It’s government spending that has grown faster. It may have been responsible for as much as 40% of India’s growth.

Modi has largely given up his campaign promise to get government out of business since early in his first term. Rather, he relies on the public sector to construct a welfare state and support growth. In the heavy years, with falling oil prices flattering Indian growth and fattening the treasury, his strategy seemed to work.

The world economy is not necessarily booming, but it seems that export-oriented countries like Vietnam and Bangladesh are doing well. In the last year, Vietnam rose at 7.3%, and Bangladesh is expected to see an 8% rise in two successive years.

The whole point, of course, is that developing countries should not depend on domestic demand alone. Old, labour-surplus nations must go out and reach global markets, not be limited to anything that can be drummed up at home. It is not possible to draw any clearer conclusions from recent economic experience.

Meanwhile, India has become a series of completely avoidable trading zones with countries like the U.S., has gone cold on a proposed free trade deal with the European Union, and perhaps most recently has declined to sign the Comprehensive Economic Partnership with Pacific Rim and Southeast Asian nations.

Rather than allowing it to succeed, the government wants to coddle the Indian business. It does not need to raise tariffs and run away from free trade; rather, it should encourage more freedom for businessmen and businesses to recruit in, make it easier for companies to find land, and end a self-defeating campaign against tax evasion that drives investors into hiding.