Modi's Economic Mess

Bloomberg Businessweek|January 20, 2020

Modi's Economic Mess
Growth is stagnating, and the people are protesting. What happened?
Anirban Nag, Jeanette Rodrigues

Just two years ago, Prime Minister Narendra Modi was helming an economy expanding 8%, spurring optimism that India was on a path to become a major driver of global growth.

Now stagflation looms as the economy grinds toward its slowest expansion in more than a decade. At the same time, inflation has spiked above the central bank’s targets, reaching a five-year high of 7.4% in December, led by higher food prices. With revenue dwindling and the budget stretched, Modi’s government has little scope to intervene with fiscal support and the economy threatens to become a political liability.

What went wrong? Policy missteps—including the banning of high-value cash notes at the end of 2016 and the chaotic implementation of a unified goods-and-services tax the following year—were followed by a drop in domestic consumption and a credit crunch. The decline in lending in turn triggered a crisis among shadow lenders, key providers of small loans to consumers and businesses.

“We are really extremely close to a point where we could be dipping into a major recession,” Abhijit Banerjee, winner of the 2019 Nobel Prize for economics, said this month to a newspaper in Mumbai. He urged authorities to abandon inflation and deficit caps. “You definitely want to stimulate demand,” he said.

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January 20, 2020