Economics & Markets

Reform, not rate cuts, key to reviving Indian economy

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney Australia

The Indian economy is currently suffering its sharpest slowdown in economic growth since 2009, with GDP growth currently running at about 4.5% year-on-year; down from 7-8% less than two years ago.

Both the Indian government and the Reserve Bank of India have taken measures to stimulate the economy. The government has made tax cuts, while the Reserve Bank has progressively cut interest rates to a near decade low of 5.15%. The central bank also recently announced an ease on lending for cars, residential housing and small businesses, and a $14 billion facility for commercial lenders to borrow more cheaply. Unfortunately, these measures have so far failed to achieve the desired boost to spending and there are no guarantees that the situation will improve over the short term.

At the same time, the government’s budget deficit is increasing, driven by extremely high growth in off-budget measures, which has crowded out growth in the private sector.

Credit expansion in the country is exceptionally weak and business investment is low, fuelled by uncertainty around the continuing slowdown. Re-capitalisation of the country’s struggling banks is likely to be needed to increase credit growth.

The cyclical slowdown across the rest of the world’s emerging economies and the weakness in China have also contributed to India’s economic performance, with new spectre of the coronavirus epidemic and its impact on Chinese manufacturing and trading adding further uncertainty to the mix.

To better stimulate spending and credit growth, it's likely that the Reserve Bank of India will implement additional interest rate cuts, following recent global trends; however, it will be constrained by India’s high inflation levels, currently running above 7% year-on-year. A more effective policy could be to try to stimulate certain private sectors of the economy and increase business investment growth.

Rather than relying on monetary policy, the Indian government will need to act decisively to turn the country’s economy around, and investors should be wary until we see more positive action to achieve that.

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Diana Mousina, Senior Economist
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