Index > Briefing
Wednesday, January 15, 2020
India's Economic Challenges Will Hinder the Implementation of "Modi's Strategy"
Under Modi’s administration, India has shown more strategic ambition than ever before. Hailing from an impoverished family, Modi led the BJP (Bharatiya Janata Party) to victory during the 2014 general election. He was elected the 14th Prime Minister of India and re-elected again in 2019. Due to great differences exhibited between Modi's BJP political actions against the long-term ruling Indian Congress Party, Modi had made great strides in his ruling, forming his unique approach that we call "Modi’s Strategy".

A series of economic development plans launched by India served as the backbone for "Modi’s Strategy". In order to develop the manufacturing industry, the country introduced the concept of “Make in India” globally in 2014. To boost economic development, India has set a goal of becoming a five trillion-dollar economy by 2024. In terms of geopolitics, India has given full play to the advantages as a South Asian power and become an important playmaker for the U.S. "Indo-Pacific Strategy". Modi's visit to the U.S. in 2019 had caused the Americans to develop a curiosity towards the country and a better need to understand India, thereby showing that India had garnered favorable international space for the use of its geopolitical advantages.

When China's economic growth continued to decline, India has become a beacon of hope for emerging market economies. However, economic development is different from geopolitics, and the implementation of "Modi’s Strategy" in the economic field is far different from India's success in the geopolitical field. Relying on political strategy and diplomatic skills alone does not guarantee economic success. In fact, under the influence of the global trade war for 2 years, India's economy encountered severe systemic challenges, and its influence as an emerging market is weakening.

India's economic problems mainly manifested in the following aspects:

First of all, its economic growth has declined significantly. In recent years, India's economic growth performance was eye-catching. Since 2014, the country’s growth in economy has surpassed China's, maintaining a growth rate of 7% - 8%. That said, India's economy showed obvious signs of significant decline in 2019. Economists predict that India's economic growth rate may drop to 5% in the 2019 fiscal year to the end of March 2020, marking the third year of its economic slowdown. In the first three quarters of 2019, economic growth was 5.8%, 5.0% and 4.5% respectively. India's economy has fell drastically to its lowest level since 2013, which surprised many analysts. Some analysts expect India's economy to rebound to 6.2% in fiscal year 2021, but growth is largely dependent on the pace of recovery in domestic spending.

Second, rising prices affect consumption. According to India’s Central Statistics Office (CSO), CPI growth in India in December 2019 was much higher than expected, rising to 7.35% from 5.54% in November. Food prices in India rose 14.12% in December, with a 60.5% increase in vegetable prices. CPI growth far exceeds the median of 6.7% in Bloomberg survey, which is the largest increase in India since July 2014. It is also the first time since July 2016 that CPI in India has exceeded the upper limit of the Reserve Bank of India's target range of 2-6%. What is worth noting is that the rise in prices has begun to affect consumption in India and that consumptions account for about 60% of India's GDP. With rising prices and layoffs, India's consumption rate has declined sharply. In the third quarter of 2019, private consumption growth dropped to a five-year low of 3.1%. The rapid rise in inflation also limits the currency operation space of the central bank of India. At this stage, the central bank's primary goal is to focus on the impact of inflationary pressure on low-income people, according to the Governor of the Reserve Bank Shaktikanta Das.

Third, India's manufacturing industry has encountered difficulties. India has launched the slogan of "Make in India" five years ago, which is India's plan to participate in globalization and develop its manufacturing industry with abundant labor resources. That said, the project seems to be a massive failure. Data shows that industrial production growth in India has fallen to its weakest level in a decade. In 2019-2020, the development of Indian manufacturing industry is sluggish, reaching a 15-year low. It is estimated that the industrial growth rate is 2%, lower than the low level of 6.9% in 2018-2019.

At the same time, compared to the growth rate of 8.7% from the previous year, India's construction industry grew less than 3.2% this year. ANBOUND researchers also noted that there is a disadvantage in India's manufacturing industry development. In a world of overproduction, Indian started its manufacturing game late, which means it will face fiercer competition than that of China at the beginning of industrialization. In fact, India's “advantage” of boasting large number of young labors will prove to be counterintuitive. In addition, from the perspective of global competition, India lacks the tradition and industrial ecology to develop manufacturing industry, and its "piecemeal innovation" is difficult to create a competitive Indian manufacturing industry.

Fourth, India's debt problem is worsening and a serious one at that. According to the IMF's previous annual economic report, India is the country with the highest debt in emerging markets, and its general government debt has surged to 68.1% of GDP in fiscal year 2019, which is the highest level in three years. In November 2019, Moody's ratings downgraded India's credit rating outlook to negative, citing issues such as the deterioration of the shadow banking crisis, the long-term slowdown and rising public debt. According to the latest data of the central bank of India, India's public debt has reached about US$ 1.4 trillion by 2019, but its foreign exchange reserves are only about US$ 401.776 billion. This means that the high growth of India's economy in the past few years is almost the accumulation of U.S. dollar debt.

ANBOUND’s chief researcher Chan Kung pointed out two key points in 2019. One is that, "Modi’s Strategy" aims to create the international marketplace for products made in India, which is similar to the development track of "Made in China" in the past. Next, "Modi’s Strategy" is based on "overall optimism" for India's future. Chan Kung stressed that this is an important feature and basis of the " Modi’s Strategy", but also its major weakness - if India's economic development does not progress smoothly as expected and if it’s economic growth faces an unexpected major decline, the defects of the plan will be exposed thereby threatening the political status of Modi’s governance

India's 2019 economic situation has since confirmed Chan Kung's risk prediction. The decline of economic growth and the rise of inflation have not only impacted India's spending power, but also caused greater social unrest in India. In 2020, India's strike swept across the country again, and about 250 million people took to the streets to protest strongly. The strike in India is a protest against the government's failure to resolve problem of rising prices and unemployment effectively. Modi once led India to create the miracle of world’s number one economic growth, but it is now also facing severe challenges due to its economic problems, which may threaten its ruling stability. It should be noted that the current difficulties faced by India's economy are not conducive to India's hegemony of the Indian Ocean, which is a blow to India's ambition, and will also create obstacles to the establishment of the “Indian Model”.

Final analysis conclusion:

India's economic predicament will cause difficulties for the implementation of the “Modi’s Strategy”. This also shows that there are structural problems in India's economic growth and the Indian model it seeks.

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