India’s Economy - Whether pretty and acceptable.

While national growth statistics rarely mean much to individual citizens, other indicators point to a real gruesome picture of struggling economy. The data released last December shows that India’s economy expanded by just 4.5 percent between July and September, its sixth consecutive quarter of slowing growth. The new figures represent a stunning decline.The country’s GDP was growing by more than 9 percent at the start of 2016, and by 8.1 percent as recently as early 2018.

The unemployment rate stood at around 7.5 percent in November, with a record-low 42 percent labor participation rate. As a result, consumer demand has weakened, leading to a perpetual cycle of slowing manufacturing, production, investment, and job creation.

Climate of fear ? Critics say that it is not just risk aversion, but fear that is causing low levels of investment and lending, contributing to the slowing growth.

In an opinion essay in the Hindu last month, the economist and former Prime Minister Manmohan Singh describes a “palpable climate of fear” across the country. He writes: “Many industrialists tell me that they live in fear of harassment by government authorities. Bankers are reluctant to make new loans for fear of retribution. Technology start-ups … seem to live under a shadow of constant surveillance and deep suspicion. Policymakers in government and other institutions are scared to speak the truth or engage in intellectually honest policy discussions. There is profound fear and distrust among people who act as agents of economic growth.”

Industrialists have started to speak up. This sentiment was echoed over the weekend at an Economic Times event by the billionaire Rahul Bajaj, the chairman of the Bajaj Group. “We are afraid … but no one will talk about it,” he said. The comments—rare among the typically pliant industrialist class—were met with applause. Minister of Home Affairs Amit Shah offered an equally rare response to Bajaj at the same event: “As you are saying, an atmosphere has been created, we too will have to make an effort to improve it. But I want to say that no one needs to be afraid.” The government’s damage control continued further, as Finance Minister Nirmala Sitharaman addressed Parliament: “To say that this government does not listen to criticism is unfair … ours is a government that hears and responds,” she said.

What can New Delhi do ? The government has already exhausted several options to improve the economy. In September, India cut its corporate tax rate from 30 percent to 22 percent in a bid to boost investment. Then announced the merger of 10 state-owned banks to shore up the ailing sector’s balance sheets. And in November, the government revealed that, it planned to raise $15 billion by selling public stakes in oil, shipping, and logistics companies.

India could take strong action by lowering interest rates, but even that option is limited: The Reserve Bank of India has already slashed rates by 135 basis points this year—the most by any Asian bank, Bloomberg reports. As already seen, India has consistently cut interest rates over two years without stopping the slowdown. Most economists say India needs to grow at nearly 10 percent a year for job creation to keep pace with the 12 million people who enter the workforce every year.

Meanwhile, government officials continue to tout Prime Minister Narendra Modi’s goal to grow the country’s $2.9 trillion economy to $5 trillion by 2024—a transformation that would highly be impossible at current growth rates. Perhaps, New Delhi can begin to address reforms by first acknowledging the scale of the country’s economic malaise.

Recently, Rajiv Kumar, the Head of the Government's think tank Niti Aayog,  claimed that the current slowdown was unprecedented in 70 years of independent India and called for immediate policy interventions in specific industries.

The Chief Economic Adviser, K Subramanian, disagreed with the idea of industry-specific incentives and argued for structural reforms in land and labour markets. Members of Prime Minister Narendra Modi's economic advisory council sound inchoate, resorting to social media and opinion editorials to counter one another.

In essence, the quibble among the members of the economic team of Mr Modi and his government is not about whether India is facing an economic slowdown or not, but about how grave the current economic crisis is.

This is a remarkable reversal in stance of the same group of economists who, until a few months ago, waxed eloquent about how India was the fastest growing economy in the world , generating seven million jobs a year.

To put all this in context, it was less than just two years ago, in November 2017, that the global ratings agency Moody's upgraded India's sovereign ratings - an independent assessment of the creditworthiness of a country - for the first time in 14 years. Justifying the upgrade, Moody's had then argued that the economy was undergoing dramatic "structural" reforms under Mr Modi.

In the two years since Moody's has downgraded its 2019 GDP growth forecast for India thrice - from 7.5% to 7.4% to 6.8% to 6.2%.

The immediate questions that arise now are: is India's economic condition really that grim and, if yes, how did it deteriorate so rapidly ? Well, looking at the larger picture, one of India's most celebrated entrepreneurs, the founder of the largest coffee store chain, Café Coffee Day, recently killed himself, ostensibly due to unmanageable debt, slowing growth and alleged harassment by tax authorities.

The auto industry is expected to shed close to a million direct and indirect jobs due to a decline in vehicle sales. Sales growth of men's inner wear clothing , a key barometer of consumption popularised by former Federal Reserve Chair Alan Greenspan, is negative. Consumption demand that accounts for two-thirds of India's GDP is fast losing steam.

To make matters worse, Finance Minister Nirmala Sitharaman presented her first budget recently with some ominous tax proposals that threatened foreign capital flows and dented investor confidence. It sparked criticism and Ms Sitharaman was forced to roll back many of her proposals.

So, it is indeed true that India is facing a sharp economic downturn and severe loss of business confidence.

The alarm over the economic condition is not merely a reflection of a slowdown in GDP growth but also the poor quality of growth.

Private sector investment, the mainstay of sustainable growth in any economy, is at a 15-year low. In other words, there is almost no investment in new projects by the private sector. The situation is so bad that many Indian industrialists have complained loudly about the state of the economy, the distrust of the government towards businesses and harassment by tax authorities.

But India's economic slowdown is neither sudden nor a surprise. Behind the fawning headlines in the press over the past five years about the robustness of India's growth was a vulnerable economy, straddled with massive bad loans in the financial sector, disguised further by a macroeconomic bonanza from low global oil prices.

India's largest import is oil and the fortuitous decline in oil prices between 2014 and 2016 added a full percentage point to headline GDP growth, masking the real problems. Confusing luck with skill, the government was callous about fixing the choked financial system.

To make matters worse, Mr Modi embarked on a quixotic move in 2016 to withdraw all high-value banknotes from circulation overnight . This effectively removed 85% of all currency notes from the economy. This move destroyed supply chains and impacted agriculture, construction and manufacturing that together account for three-quarters of all employment in the country.

Before the economy could recover from the currency ban shock, the government enacted a transition to a new indirect taxation system of the Goods and Services Tax (GST) in 2017. The GST rollout wasn't smooth and many small businesses initially struggled to understand it.

Such massive external shocks to the economy, coupled with a reversal in low oil prices, dealt the final blow to the economy. Millions of Indians started to lose their jobs and rural wages remained stagnant. This, in turn, impacted consumption, slowing down the economy sharply.

Not easy : The wobbly state of the economy has also thrown government finances in disarray: tax revenues are much below expectations.

Recently, the government got a much-needed breather when India's central bank announced a $24bn (£19bn) one-time payout for the cash-starved government. (This amount is more than the dividend paid by the central bank to the government in all five years of the Congress rule between 2009 and 2014.)

The solutions to the economic crisis are not easy. Indian industry, fed and fattened with government protection through decades, is once again clamouring for tax cuts and financial incentives. But, it is not clear that such benefits will revive private sector investment and domestic consumption immediately.

For all the hype about the Make in India programme , hailed as the harbinger of the country's emergence as a manufacturing power, India's dependence on China for goods has only doubled in the past five years.

India today imports from China the equivalent of 6,000 rupees ($83; £68) worth of goods for every Indian, which has doubled from 3,000 rupees in 2014. India's exports have remained stuck at 2011 levels and not grown. So, India is neither making goods for itself nor for the world. India's agrarian crisis is a major stumbling block.

Ornamental tax and other fiscal incentives to specific industries are not suddenly going to make Indian manufacturers competitive and stop India's addiction for affordable Chinese goods. If any, the trade spat between China and the United States only saw countries such as Vietnam and Bangladesh benefit and not India.

More currency or trade tariffs are not the solutions either. The central bank has lowered interest rates and there is some push to lowering the cost of capital for industry. But again, Indian industry will invest more only when demand for goods and services increases. And demand will increase only when wages increase, or there is money in the hands of people.

So, the only immediate solution for India seems to be to boost consumption through a stimulus given directly to people, in the classical Keynesian mould. Of course, such a stimulus should be combined with reforms to boost business morale and confidence. In sum, India's economic picture as being projected by government, is neither pretty nor acceptable.

Prime Minister Modi has a unique electoral mandate to embark on bold moves to truly transform the economy and pull India out of the woods. However, it is important for India's political leadership to see this not-so-pretty picture and not hide behind rose tinted glasses.