The Bottom Line.
In this India insight, Economist Vivien Massot analyses the reelection of PM Modi. “The reelection of N. Modi for 5 years has come with a surprise absolute majority of the ruling BJP”, he writes, while adding that “higher external uncertainties (slowdowns in US and China, global oil prices) make it harder to project Indian medium-term outlook”.
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India economic insight: PM Modi reelected amidst economic slowdown
[By Vivien Massot]
This insight was originally published by TacEconomics.
The reelection of N. Modi for 5 years has come with a surprise absolute majority of the ruling BJP; as mediocre economic performances have been trumped by nationalist / “populist” rhetoric for electoral votes. The ongoing cyclical-and-structural adjustment appears hugely frontloaded, with PM Modi’s policy continuity likely to fuel economic recovery before year-end.
Modi’s reelection: a political feat.
The Bhartiya Janata Party (BJP – right) and its allies of the National Democratic Alliance (NDA) have won a sweeping mandate in the general elections (353 seats out of 545). Narendra Modi is the first Prime Minister in nearly 50 years to win majorities in back-to-back elections; the impressive electoral exercise was held over seven phases from April 11 to May 19, 2019, with the highest turnout in history (67%) for 900 million eligible voters (1 million polling stations!).
PM Modi’s major policy shocks (demonetization, implementation of GST), progressive erosion of institutions, persistent agricultural distress, poor job growth and major social welfare program promised by the main opposition party (Indian National Congress – center left) had created a significant base for an anti-incumbency wave. Yet, Modi has been successfully able to brand a nationalist sentiment and project a strong man persona at the forefront of the campaign, especially since the January terrorist attack (40 soldiers killed in Kashmir and military retaliation against Pakistan).
India’s inescapable economic slowdown.
Over the last five years, the NDA government has achieved several effective reforms (overhauled indirect tax system, financial inclusion, health and pensions schemes, bankruptcy code, openness to FDI, etc.). After a temporary consolidation of the GDP growth in 2018 (+7.1% y/y from +6.7% in 2017), economic activity has reversed faster-than-expected in the last three quarters. Synchronized deceleration in both private and government consumption as well as drag of net exports have impacted the recent GDP growth trajectory (+5.8% in 2019Q1).
A sharper slowdown should occur in 2019Q2 (but less likely in Q3); as the engine of GDP growth in India, consumption is rapidly going down (low-income growth in rural sectors, deceleration of fiscal spending, confidence drop during general elections). In addition, there is a strong adverse base effect, especially for the investment dynamics, that weighs on headline GDP growth outlook. Overall, this suggests a massive frontloading of the cyclical adjustment, with potential for near-term recovery.
India: quarterly GDP Growth projections
Source: MOSPI, TAC ECONOMICS
Meanwhile, weaknesses and related uncertainties in the financial sector continue to persist in 2019: the Prompt Corrective Action framework (lending freeze or curbs, capital requirements, etc.) of the RBI is still in place for five public-sector banks, despite a massive USD 28bn recapitalization by the government over the last two years.
The IL&FS crisis, i.e. waves of defaults by the sprawling shadow bank for infrastructures, has serious spillover effects on domestic confidence and stock markets.
Lastly, full resolutions of non-performing assets should be deferred given the Supreme Court squashing RBI’s dedicated circulars. Going forward, an enhanced framework for the supervision of banks and NBFIs will be considered by authorities; similarly, strategic consolidation of banks (with or without disinvestments) should yield a positive outcome for banking and credit performances. Nevertheless, the recovery for higher credit distribution will be postponed, if not curtailed in the short-term.
Modi 2.0: ignition of economic growth?
Several factors are favorable to ignite a rebound in GDP growth around the turn of 2020, although higher external uncertainties (slowdowns in US and China, global oil prices) make it harder to project Indian medium-term outlook.
Investment dynamics (above +10% y/y since 5 quarters) and business conditions (Manufacturing PMI at 52.7 in May 2019) are still positive; while RBI will ease further its monetary policy (one or two 25bps cut before year-end).
Finally, expectations of resumption of structural reforms momentum (direct taxes, ease of doing business) and of infrastructures boost have triggered sizeable financial rally (Sensex crossing historical high of 40,000 points), yet surging speculative capital inflows come with higher risks of currency volatility.
Vivien Massot | Economist, Managing Director India at TAC ECONOMICS.
Vivien Massot is the Managing Director India at TAC ECONOMICS & a French Foreign Trade Advisor (Conseiller du Commerce Extérieur de la France – CCEF).
Vivien originally joined TAC ECONOMICS in France in 2009 as an economist to work on country risk analyses as well as on specific country studies; he is also in charge of the overall knowledge management. Since 2010, he has returned to India to manage our subsidiary with a local team of three analysts/economists.
Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.
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