India’s growth slowed to 5% in the three months to June from a year ago, lower than economists predicted and below the average 7%-8% quarterly expansion seen in the past few years.
For almost half a decade, Indian Prime Minister Narendra Modi headed the fastest-growing major economy in the world. Now, the slowest expansion in six years has put India behind China, Indonesia and a few others in the region.
The slowdown in gross domestic product growth has prompted Goldman Sachs and Citigroup to cut India’s growth projection to 6% for the fiscal year through March 2020, although the government is sticking to its forecast of 7%.
If Modi wants to make his pledge to turn the country into a $5tn economy by 2024, from $2.7tn now, India needs its economy to expand at a 9%-10% pace for a sustained period of time.
But with growth slowing for the past five straight quarters, and no sign of a respite, that’s a setback for efforts to fix the extreme income gap.
In a country of 1.3bn people, India’s per capita income is about $2,000 a year - dwarfed by China’s $9,800 and the US’s $62,600. India needs faster growth even to catch up with other Asian countries such as Indonesia, where per capita income is at $3,900, and South Korea’s $31,000.
The US-China trade war, amid growing fears of a US recession, has been hurting India’s exports as well.
The bigger problem, however, is the slide in domestic consumption, which makes up nearly 60% of India’s GDP.
The economy has been shedding jobs, banks have curbed loans and farmers’ incomes have been subdued. The jobless rate jumped to a 45-year high of 6.1% in 2018. There’s more pain to come as the struggling auto sector - which makes up almost half of India’s manufacturing sector - continues to cut jobs.
Car sales in India suffered their biggest monthly drop on record in August.
The slide in consumer spending and plunge in auto sales mean overall manufacturing, which contributes about a fifth to the economy, is barely growing, and businesses are curbing investment.
Private sector research suggests India is experiencing jobless growth and failing to create high-quality employment.
India will have the world’s biggest labour force by 2027. The government estimates the country will need an extra 110mn workers across the sectors by 2022 compared with the 105mn who will enter the workforce.
India has a gargantuan task of skilling 400mn workers/jobseekers by 2022.
For sure, the government has taken a number of steps to bolster the economy. It plans to merge weak state-run banks with stronger ones, hoping that can spur lending. Foreign investment rules were eased and tax breaks given on vehicle purchases.
Most of these measures, however, are focused on improving the long-term potential of the economy, rather than providing a short-term boost.
Longer term, India’s policy makers need to learn from mistakes committed in the past. The shallow, short-term economic thinking should give way to a sustainable, futuristic growth vision to create jobs, lift millions of Indians out of poverty and ensure social inclusion.
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