Now, stagflation looms as the economy grinds toward its slowest expansion in more than a decade and inflation spikes above the central bank’s target, driven by higher food prices.
Social unrest against a restrictive new citizenship law is yet another challenge.
And there are few good options to deal with the slowdown. Dwindling government revenue and an already-stretched budget limit scope for fiscal support, plus the shock 7.35% surge in retail inflation in December and the threat of higher oil prices mean the door for further interest rate cuts is closing.
Sovereign bonds dropped after the inflation data.
The yield on the benchmark ten-year bond rose as much as ten basis points to 6.7% yesterday, the most since Dec 5.
Wholesale price inflation quickened to a seven-month high of 2.59% last month, latest data showed.
So, what went wrong? At the heart of India’s problems is a slump in consumption following a combination of policy missteps, from the unprecedented decision to ban high-value cash notes at the end of 2016, to the chaotic implementation of a unified goods and services tax the following year.
That was followed shortly after by a credit crunch, which triggered – and then was worsened by – a crisis among shadow lenders which are a key provider of small loans to hundreds of millions of consumers and businesses.
Consumer sentiment remains in the doldrums and the recent volatility in oil prices could be a further drag on spending.
Economic growth in the fiscal year through March 31 is set to slow to an estimated 5%, the weakest pace in more than a decade.
“The recovery is likely to be very gradual and a stagflation scenario is likely,” Teresa John, an economist at Nirmal Bang Equities Pvt in Mumbai, said. Stagflation refers to a condition of accelerating inflation and weakening growth.
The central bank’s five interest-rate cuts last year and billions of dollars of liquidity pumped into financial markets have done little to spur lending.
That’s because banks are already saddled with one of the worst-stressed asset ratios in the world and are neither lending much nor transmitting rate cuts to borrowers.
The government has taken steps to revive the economy, but they aren’t bearing fruit yet. Finance Minister Nirmala Sitharaman gave companies US$20bil worth of tax cuts, merged weak state-run banks with stronger ones and eased foreign investment rules.
The government will also sell state assets in its biggest privatisation drive in more than a decade.
“We are really extremely close to a point where we could be dipping into a major recession,” Abhijit Banerjee, winner of the Nobel Prize for economics last year, said this month in Mumbai.
He urged authorities to abandon their inflation and budget deficit targets and stimulate demand.
There are some early signs that the economy may be bottoming out.
The latest high-frequency indicators, such as the purchasing managers’ indexes for manufacturing and services, show activity is picking up.
Industrial production and capital expenditure also improved late last year. —Bloomberg
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