Sales of cars have declined over the past year in India, an indication that growth might be slowing in the country. (Nasir Kachroo/NurPhoto/Getty Images)
NEW DELHI — It was not the kind of news a freshly reelected government likes to hear.
Days after Narendra Modi was sworn in for a second term as India’s prime minister, industry data showed that sales of passenger vehicles experienced their biggest slump in 18 years in May. The next month’s figures were almost as bad, indicating substantial declines in the number of cars sold nationwide compared with a year earlier.
The nose-dive in the auto industry feeds into a growing set of worries about India’s economic trajectory. In recent years, India’s official gross domestic product (GDP) figures showed it to be the fastest-growing major economy in the world. Now its economy is undeniably losing speed, and the key uncertainty is how long the softer pace of growth will last.
What’s more, some economists are questioning whether India truly deserved the title of the globe’s fastest-growing major economy in the first place — and those questions are coming straight from the top.
In June, Arvind Subramanian, who stepped down as the government’s chief economic adviser last year, released a paper arguing that India’s GDP growth was considerably slower than the official figures showed from 2012 to 2017. The government rejected such conclusions.
Still, all of this adds up to a major policy challenge for the Modi government. To achieve its goal of turning India into a $5 trillion economy by 2024, the economy must expand significantly faster than it is growing today. Rapid economic growth is also crucial if India is to generate jobs for its youthful workforce, eradicate extreme poverty and achieve Modi’s aim to turn India into a major player on the world stage.
The ripples of unease about the accuracy of the official figures make the task even trickier. If the “government itself is formulating policies based on growth numbers that may not be correct, then you are setting yourself up for making the wrong policy choices,” said Jahangir Aziz, head of emerging market economics at JPMorgan Chase.
The predicament of the auto industry is a prime example of the effect of slower growth. Some manufacturers have announced rolling shutdowns of their production lines because there is not enough demand for their vehicles.
“It’s very bad,” said Sugato Sen, deputy director general of the Society of Indian Automobile Manufacturers. He said the only period he could remember when the business experienced a similarly prolonged slump came in 2001.
Arvind Subramanian, India’s former chief economic adviser, argued that the country’s GDP growth was considerably slower than official figures showed. (Prakash Singh/AFP/Getty Images)
Regulatory changes have increased the cost of cars, and a credit squeeze has affected nontraditional lenders extending auto loans. But fundamentally, Sen said, the decline in sales is a question of sentiment. The sector “depends very significantly on how people feel,” he said. “When the economy grows, the industry does well, but when the growth rate falls below a certain level, that impacts the industry very, very significantly.”
In the fiscal year that ended in March, India’s GDP growth declined to 6.8 percent, the lowest rate in five years. In the most recent quarter, the annual growth rate was just 5.8 percent, the first time the country’s quarterly economic growth trailed China’s in two years. India’s challenge is an echo of what developing economies around the world are facing as a widening trade war initiated by the United States depresses sentiment and investment. India’s state-owned banks are also burdened by corporate loans gone sour, which has made them more reluctant to lend.
Some economists see India’s slowing growth as a temporary phenomenon. They say output will re-accelerate as measures to kick-start economic activity — such as lowering interest rates — gain traction. “Growth is slipping, but you need to look a little ahead,” said Dharmakirti Joshi, chief economist at Crisil, an Indian ratings firm owned by Standard & Poor’s. “I’m more positive on the, let’s say, five-year outlook than the current year outlook.”
Others say the deceleration is partly the product of some of the Modi government’s policy choices in its first term. Such measures include the decision to implement a nationwide value-added tax (a step economists say is necessary in the long run) and the surprise decision to invalidate most of the country’s bank notes (a step many economists say was disastrous).
Other experts contend the malaise in the economy runs deeper and preceded the Modi government. Subramanian argued in a paper first released in June that India’s GDP growth figures from 2012 to 2017 do not correspond with some of the underlying economic indicators.
According to the official figures, “India somehow sustained an economic boom in an environment with substantially lower investment, profits, exports, credit financing, and probably consumption,” Subramanian wrote in a follow-up piece this month. “That leaves us with a deep puzzle.”
By his calculations, rather than expanding at a rate of 7 percent per year, India’s economy probably expanded at closer to 4.5 percent per year after 2011 — an economy growing “solidly but not spectacularly.”
Subramanian’s piece set off a minor firestorm. A council of economists who advise Modi disputed the arguments in the paper and said it “lacks rigor.” Rakesh Mohan, the former deputy governor of India’s central bank, expressed doubts about Subramanian’s methodology and questioned his decision to go public with a detailed analysis.
“You should be telling the truth, but in what fashion?” said Mohan.
If Subramanian’s conclusions are correct, then “any company, any investor” would have to rethink its expectations of India’s economy.
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