Modi’s growth mythology needs a reboot

By Andy Mukherjee

India’s economy needs a readjustment, and not just in fiscal and monetary policies. The whole folklore around emulating China’s multi-decade investment boom is proving to be illusory. With growth at its weakest pace in four years, it’s time to put that legend to rest, and start helping ordinary families keep their heads above water.

Around this time last year, I wrote about India’s growth with Chinese characteristics: anemic consumption and overemphasis on investment. Back then, the myth of an impending tsunami of capital expenditure was still trumping the reality of a sharp slowdown in retail spending, and Narendra Modi was about to launch his bid for a third five-year term.

It’s unclear how much corporate bosses in Mumbai and New Delhi believed in the prime minister’s promise of an “Amrit Kaal,” an epoch of abundance in Indian astrology. But they did hop on their private jets to join him for the grand inauguration of a $200 million temple, dedicated to the Hindu god Ram and built at a site where a mosque had been razed by a mob in 1992.

The billionaires’ presence wasn’t just a photo-op. It had a mythological significance tied to the strongman leader’s personality cult. A year before the temple consecration, Modi’s Finance Minister Nirmala Sitharaman had wondered if, when it came to investing, India Inc. was like Hanuman, the monkey god from the epic Ramayana who had to be reminded of his own strength.

“You don’t believe in your own capacity…and there has to be someone standing next to you and say, ‘You are Hanuman — you can do it?’’’ she asked at a gathering of industrialists.

As the finance minister readies to present her annual budget next month, she would hopefully no longer rely on a giant leap by companies. It won’t occur, certainly not in 2025. Some shift of supply chains from China to India by Western multinationals such as Apple Inc. will continue apace, though merely assembling products won’t add much value. In a year made extremely tricky by Donald Trump’s return to the White House, it would be a mistake to take Modi’s coalition government into battle against the deepening growth funk on the strength of big-ticket private investment. And while the minister should step up public infrastructure, her priority must be families not firms.

Companies are reluctant to put up new factories. They don’t know what kind of pressure they will face from Chinese rivals who, squeezed by Trump’s trade war, will seek to capture markets elsewhere, including India. Nor is it clear yet how much the yuan would weaken in response to US tariffs, and how that might affect India’s $100 billion-a-year trade deficit with its neighbor. “We are concerned that India’s broader cyclical slowdown amid rising global uncertainties may impede private investment appetite in the near term,” Nomura economists noted, after new project announcements slumped 22 per cent last quarter from a year earlier.

Above all, firms don’t know if domestic consumers will be able to buy what they make. Car dealers are awash with nearly two months of unsold inventory. Household finances are stretched at the bottom of the pyramid. The central bank is tightening access to personal loans to stem rising defaults, and that — together with a high cost of living — is forcing people to cut back even on essentials.

There isn’t much room for deep interest-rate cuts, lest those lead to an uncontrolled slide in the rupee. A weakening currency may make energy imports dearer. It could also prompt foreigners to pull more money out of a wobbly — but still expensive — stock market. Fiscal policy has to be the main lever.

But politicians of all hues are misallocating tax resources and cynically exploiting voters’ desperation — first by promising cash handouts to women before state elections, and then pruning the list of beneficiaries after winning power. Meanwhile, the nationwide goods and services tax, introduced by the Modi government with much fanfare in 2017, has gone utterly wild, with one rate for salted popcorn and another for sweet. Even delivery workers making 30 cents per trip on 10-minute online orders are indirectly paying GST on their earnings.

Fixing the broken GST, and using a part of the revenue to pull Indian cities out of their unending cycle of despair, are medium-term projects involving 28 state governments. When it comes to the federal budget, however, there’s a clamor for income-tax cuts for the middle class. Some relief is coming for those earning up to $18,000 a year, Reuters has reported, though it remains to be seen whether this will steady urban demand.

Overall, the situation is less than cheerful: A recent survey of 16,000 consumers by New Delhi-based LocalCircles showed that one in four of them expects their household earnings to drop by 25 per cent or more in 2025.

The statistics office expects the economy to expand 6.4 per cent in the current fiscal year, slowing from 8.2 per cent in the previous 12 months. The last time India faced a growth slump just before the pandemic — in 2019 — the government responded with a surprise reduction in the corporate tax rate. If it was the wrong medicine then, it’s unlikely to be any more effective now. So even though the Modi administration has an ideological preference for relying on corporate investment and profits, rather than wages and consumer spending, its mythology of growth needs a different hero this year. It’s the 1.4 billion consumers who need the government to stand next to them and say, “Yes, you can do it.”