Forecasting Eye 

 

In keeping with recent trends of polls being misleading, the results of the Indian election last month saw Narendra Modi re-elected with a rather unexpected outright majority. The leader of India’s Bharatiya Janata Party (BJP) secured a 60-seat majority in a country which so often ends up with minority governments and vast coalitions.

 

But the picture is not all rosy for the Modi government. Around the same time as his election victory, economic data showed a slowdown in the Indian economy. Year-on-year GDP growth slowed to 5.8% in the first quarter of 2019, compared to nearly 8% just one year previously. Perhaps more worryingly, for the first time in two years the Indian economy is growing slower than in China;  problematic for a leader and party staking so much reputation on their ability to deliver solid economic growth.

 

Consumer spending is a key driver of the Indian economy. Data show that consumer spending declined by around 2% in the second half of 2018 [1]. While more than recovering since, long term indicators show that the Indian economy is likely to have a continued battle to keep consumer spending growing. Car sales, for instance, are at their worst for eight years having slumped nearly 20% in one year alone and Hindustan Unilever (a consumer goods company) recently posted their worst results for 18 months. All of this is significant in a country that is so reliant on consumer spending to keep the economy ticking.  If current trends continue, declining consumer spending could be associated with a $25bn cost to the economy by 2021 [2].

 

A decline in the growth of domestic consumption is perhaps somewhat inevitable. It has thus far been heavily influenced by a rapid growth in the size of the middle class and a boom in real estate prices, both of which can only last so long. What is now of crucial importance is how the Indian economy responds and restructures.

 

An avenue that will become increasingly important for India is its ability to increase exports. The economy has traditionally performed badly when it comes to net exports. It is unique among the BRICS countries in having a negative trade balance on goods and services – approximately $72 billion in 2017 [3], driven by significant deficits in the trade of goods. Despite this, there are reasons to be optimistic about the future. India’s democratic institutions are likely to be an asset in achieving greater integration with Western democracies. Furthermore, the Modi led BJP government have clearly acknowledged the importance of exports. Their ‘Make in India’ campaign has sought to cut red tape in order to improve India’s manufacturing competitiveness and increasing infrastructure investment is attempting to address the traditional Achilles Heel of the Indian export sector. All of this points towards an increasingly successful export-orientated growth model.

 

The ability of the Indian economy to restructure in this way is likely to be of vital importance in the coming years, not only for the reputation of the Modi government but for the continued climb of the Indian economy towards becoming an economic superpower.

 

[1] Trading economics, Ministry of Statistics. [2] Based on historic data on Indian economy and trend consumption growth between 2014-18 . [3] World Bank data.

 

Contact: Harsha Ramesh hramesh@cebr.com phone: 0207 324 286