For much of the 21st century, India has been hailed as an up and coming financial power. A vast, young population, increasing attempts to drive down corruption, and a growing educated urban middle class with consumer aspirations have all combined to position India as a future leader of the world economy as more established powers like Europe and North America began to age.
For many years the World Bank and IMF along with independent analysts have touted India as the world’s fastest-growing economy, with the strongest outlook over the medium term. Things haven’t gone according to plan, however.
In December 2019, the Reserve Bank Of India slashed its growth forecast for GDP from 6.1% to 5%.
There’s also evidence to suggest that the slowdown might be worse than first thought. Over the first eight months of the fiscal year, indicators suggest that imports and non-oil exports have fallen.
There’s also been a decline in the production of investment goods. There’s been a 1 per cent drop in government receipts and a similar fall in the production of consumer goods.
Lending has also fallen, with the country currently in the grip of a full-blown credit crunch that is further impacting on growth. Taken together, it’s a perfect storm of negative indicators that suggest something might be going seriously awry.
The crisis has been a long time in the making. Problems with methodology have plagued GDP estimates since a new data system was introduced a few years ago. As a result, the official average growth rate of around 7.5% has been significantly overestimated.
The overstated growth figures have masked worsening systemic issues. A serious balance sheet crisis has been allowed to grow over the past few years and corporate profitability all but collapsed after the global financial crisis.
According to Credit Suisse, the share of debt still owed by companies who aren’t profitable enough to service credit payments now stands at 40%. Business confidence has since collapsed with investment put on hold.
That said, India remains popular with investors. A cheap labour force, a growing middle class and reasonable institutions mean the fundamentals are positive in the medium term.