Narendra Modi is struggling to boost Indian growth

Ahead of India’s budget on February 1st, Narendra Modi asked Lakshmi, the Hindu goddess of wealth, to bless the poor and the middle class. The prime minister’s request for divine intervention mingled public spirit with political self-interest: frustration about economic growth and joblessness contributed to Mr Modi’s loss of his outright majority in elections held last year. As it turned out, the middle class, rather than the poor, ended up the real winners of the fiscal statement. Nirmala Sitharaman, Mr Modi’s finance minister, announced tax cuts that were worth around 1trn rupees annually ($12bn, or 0.3% of GDP), which was enough to exempt millions of relatively high-earning Indians from income tax altogether.

India urgently needed a change of approach. According to the most recent data, the country’s economy is growing at just 5.4% a year, down from 8.1% in 2023 (see chart). The Economic Survey, produced by the government’s chief economic adviser ahead of the budget, forecast growth of 6.3-6.8% in the year to come, below both the pace set in the years following covid-19 and India’s average growth rate of 7% or so in the decade before the pandemic. If India is to achieve the government’s aim of becoming a developed country by 2047, it will have to sustain growth of at least 8%.

A temporary slowdown would not be too much of a problem. Some of the previous rapid growth reflected big spending by the urban middle classes, who had pandemic-era savings to put to use. Policy then became more restrictive. At the end of 2023 India’s central bank (the RBI) warned commercial lenders against overly generous loans and tightened restrictions on consumer borrowing. Government spending was then interrupted by last year’s general election, which ran from April to June. By December only 62% of budgeted capital expenditure had actually taken place, compared with 67% the previous year.

Policy has now become more stimulative. On January 27th the RBI announced measures, including repo auctions and outright bond purchases, to improve banking liquidity. Sanjay Malhotra, the RBI’s new governor, who took office in December, will meddle less with the exchange rate. Bankers speculate that previous attempts by the central bank to stabilise the rupee against the dollar had drained the money market. On February 3rd the rupee fell to its lowest level ever against the dollar. A cheaper currency should boost export competitiveness and the value of remittances from India’s diaspora.

The tax cuts should also fuel consumption among India’s urban middle classes. The new threshold for income-tax payment is, at $14,000 or so, around five times the median annual wage of a salaried Indian employee. Already, just 76m of India’s 589m-strong workforce file a tax return, with the majority having no tax liability at all. Agricultural income is exempt altogether, and 43% of Indians work on farms. Ministers hope that leaving more money in the pockets of India’s urban middle class will increase demand for the goods and services produced by those lower down the income distribution, who carry more political heft. Shares in India’s consumer-goods firms rallied following the budget.

Factory farming

Meeting Indians’ longer-term aspirations is a much more difficult task. It means building a broader middle class and supporting the creation of good working-class jobs. Although the country’s highly competitive services sector provides strong export earnings, it does little for employment. Manufacturing, which tends to be better at soaking up labour, has fallen as a share of GDP to just 13%, its lowest since 1967. Private capital investment, rather than the state-directed kind in bridges, ports and railways, has been sluggish for decades. India’s official unemployment rate may be low at 3.2%, but millions struggle in poorly paid informal work.

Moreover, the path to prosperity beaten by China, South Korea and other Asian countries—building low-value manufacturing, before then attracting more complicated forms of industry—is becoming much narrower. The world has entered an era of protectionism and tariffs, and India must cope with the flood of cheap goods from China and an increasingly difficult American market. At the budget, Ms Sitharaman announced a swathe of tariff cuts, including on components for consumer electronics, electric vehicles and the capital equipment used to manufacture them. Tellingly, she also cut tariffs on Harley-Davidson motorcycles, a long-term ask of Donald Trump. During the American president’s first term, India failed to attract companies pursuing a “China plus one” strategy (ie, shifting parts of their supply chain out of China). Instead, India’s government maintained trade barriers that sought to push firms to move whole supply chains to India. Ministers are wise to take a different approach this time round.

Yet boosting Indian manufacturing will require additional deregulation from an exhausted and insecure government. There were some steps in the right direction at the budget. A “high-level panel”, convened to examine permits and licences, will seek to make it easier to do business in the country. Failing to comply with some rules, such as by filing a tax return late, will be decriminalised and no longer carry a jail sentence. In other matters, not least the especially sensitive issues of labour and land regulation, there is little evidence of progress. And although the budget itself did not provide much direct support for the poor, India’s government has tilted towards more welfarist policies via direct handouts that are distributed by state governments, often timed to coincide with elections. In the absence of greater government ambition, India’s best hope may lie in more divine intervention. ■

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