No matter who wins 2019 Indian LokSabha elections next Govt. Will face severe Economic growth challenges, heres how?
As India lumbers towards the final phase of an exhausting general election and Prime Minister Narendra Modi's BJP seeks a second term in power, there's some worrying news. The world's fastest growing major economy appears to be headed for a slowdown.
The signs are everywhere. Economic growth slowed to 6.6% in the three months to December, the slowest in six quarters. Sales of cars and SUVs have slumped to a seven-year-low. Tractors and two-wheelers sales are down. Net profits for 334 companies (excluding banks and financials) are down 18% year-on-year, according to the Financial Express newspaper.
That's not all. In March, passenger growth in the world's fastest growing aviation market expanded at the slowest pace in nearly six years. Demand for bank credit has spluttered. Hindustan Unilever, India's leading maker of fast moving consumer goods, has reported March quarter revenue growth of just 7%, its weakest in 18 months.
One newspaper wondered whether India was "losing the consumption plot". Taken together, all this points to a fall in both urban and rural incomes, leading to demand contraction. A crop glut has seen farm incomes drop. And credit stagnation, partly triggered by the collapse of a major non-banking financial institution, or a shadow bank, has led to a fall in lending and worsened matters.
Kaushik Basu, former chief economist of the World Bank and professor of economics at Cornell University, believes the slowdown is "much more serious" than he initially believed. "The evidence is now mounting to the point where it can no longer be ignored," he told me.
One reason, he believes, is the controversial currency ban in 2016 - also called demonetisation - which adversely hit farmers. More than 80% of the currency circulating in India's sprawling cash-driven economy was taken out of circulation in what, in the words of one of Prime Minister Modi's own advisers, was a "massive, draconian, monetary shock".
India's rapid growth has been essentially powered by its top 100 million citizens. The leading indicators of economic prosperity, he says, are things that these Indians consume - cars, two wheelers, air conditioners and so on. Having had their fill of home-made goods, they have now moved to imported luxuries - foreign holidays and Italian kitchens, for example.
A majority of Indians want nutritious food, affordable clothing and housing, health and education, which really should be the leading indicators of economic growth. "Subsidies and income support cannot pay for such consumption on a massive scale. At least half the population should earn incomes that enable them to buy these at affordable prices so that a maximum of 500 million people can be subsidised to improve their welfare," Dr Roy says.
Unless India is able to do this in the next decade or so, Dr Roy believes, it is headed for what economists call a "middle income trap", when a country stops being able to achieve rapid growth easily and compete with advanced economies. Economist Ardo Hannson defines it as a situation when countries "seem to get stuck in a trap where your costs are escalating and you lose competitiveness".
INSIGHTS MARKETS & ECONOMY
On the surface, India's economy has been strong for the first half of 2019, with the BSE30 (an index that tracks 30 financially sound Indian companies) returning over 7% since January 1.
According to Moody's Investment Services, economic growth of approximately 7.5% is expected for 2018 and 2019. The expected growth is reflective of strong demand for goods and services and increasing industrial activity among the eight core sectors: coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity.
However, despite India's optimistic outlook and recent stock market bull run, the nation still faces deep-rooted, persistent challenges in 2019.
Population Growth
India ranks second after China in total population. Its population has grown 20% per decade, leading to problems that include food deficits, sanitation deterioration, and pollution. Although economic growth numbers look promising, the living standards of most citizens are not changing.
Malnutrition is a severe problem in India that is causing childhood stunting, anemia in women of reproductive age and overweight adult women, according to The Hindu Business Line. Only 6% of India's poor have access to tap water versus 33% of the non-poor. Sanitation is a massive ongoing problem that the government has been unable to address.
For example, 21% of India's poor has access to toilets versus 62% of the non-poor. Most of those without access are people who live in urban slums and rural areas. A large populace in the rural areas still defecates in the open.
China, the United States, and India are the three most egregious environmental polluters in the world in that order. India uses coal for 75% of its power requirements, and it has been slow to transition to cleaner energy sources. New Delhi and other cities in India are among the most polluted in the world, and car emissions in these urban areas are creating breathing and other health problems.
Deteriorating Infrastructure
India has struggled to improve its deteriorating infrastructure in business, education, and healthcare. India's power grid is overstressed, and power failures have been daily occurrences in the most developed areas of Delhi, Mumbai, and Bangalore. The need for generators to provide power and air conditioning during power failures results in additional costs that businesses must subsume.
