It's now official: The Indian economy is suffering through a major slowdown, and one that shows no immediate sign of easing. The only surprise is that the estimate for growth in gross domestic product last quarter isn't even lower than the announced 4.5%.
When the Narendra Modi-led government presented its first budget after being re-elected, it expected growth in 2019-20 to be around 7%. A few months later, the Reserve Bank of India slashed that to 6.1%. It is hard, now, to see how even that rate — relatively slow by India's past standards — will be achieved.
Hidden in the disaggregated numbers is the story of what has gone wrong. Investment has collapsed. It contracted 3% in real terms last quarter, after growing almost 12% in the same quarter last year. What has grown faster is government spending. It may have been responsible for as much as 40% of whatever growth India did have.
Since early in his first term, Modi has largely abandoned his campaign promise to get government out of business. Instead, he's relied on the public sector to build a welfare state and prop up growth. In the heady years, as falling oil prices flattered Indian growth and fattened the treasury, it looked like his strategy was working.
But the money is rapidly running out. Including spending by provincial administrations, the deficit is approaching 8% of GDP. Claims that public spending would make investment more attractive for the private sector have not been borne out. There simply isn't enough money to go around — with the government taking the lion's share of financial savings, private investment has to be content with the meager leavings.
India's government has nobody else to blame. The economy has slowed in the past — most recently, during the commodity boom and the "taper tantrum" — but on each such occasion there was some sort of exogenous calamity it had to deal with. There hasn't been a bad monsoon, or sudden commodity price inflation, or a balance-of-payments crisis. The world economy isn't exactly booming, yet export-oriented economies like Vietnam and Bangladesh seem to be doing fine. Vietnam grew at 7.3% in the last quarter, and Bangladesh may see two successive years of 8% growth.
Mismanagement at home and increasing protectionism abroad have ensured that India has dropped out of that group of fast-growing emerging economies. It's fashionable in India to worry about slumping consumer demand and blame it for the slowdown. The remedy, some argue, is to open the government's spending tap still further. Certainly, it's possible to see a temporary revival in the medium term if handouts increase. But that won't be sustainable. At some point, the ballooning overall deficit is really going to bite.
The whole point, surely, is that developing countries shouldn't be dependent only upon domestic demand. Young, labor-surplus nations must go out and tap world markets, not limit themselves to whatever can be drummed up at home. No stronger lesson can be drawn from recent economic history.
Instead, India has gotten into a series of entirely avoidable trade spats with countries like the U.S., gone cold on a possible free-trade deal with the European Union and most recently refused to sign the Regional Comprehensive Economic Partnership with countries from the Pacific Rim and Southeast Asia.
The government wants to coddle Indian industry instead of giving it the means to compete. It need not raise tariffs and run away from free trade; it should instead allow entrepreneurs and companies greater flexibility in whom they hire, make it easier to find land for industry, and end a self-defeating crusade against tax evasion that has scared investors into hiding.
It's still possible to hope that something may change in New Delhi. Modi has already reinvented himself once, from a business-friendly chief minister to a welfarist prime minister. He could be capable of a third act, in which he re-invigorates Indian industry and manufacturing through drastic structural reform. But don't hold your breath waiting.
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.