A year ago, India recovered with a spring in its step from a recession caused by Covid-19. The country had overtaken China as the most populous country, and its leaders declared India the fastest growing major economy in the world.
This was music to the ears of foreign investors and Indian Prime Minister Narendra Modi, who bragged about his country's inevitable rise at every opportunity. A strengthened India, home to 1.4 billion people, could become an economic workhorse for the power of the rest of the world, which is stumbling through the fog of trade wars, China's troubles and Russia's invasion of Ukraine.
India ousted Britain in 2022 as the fifth largest economy in the world, and next year Germany is expected to be pushed aside into fourth place. But India has lost a step, exposing its vulnerabilities even as it rises in the global rankings.
The stock market, which has been booming for years, just wiped out the gains of the past six months. The currency, the rupee, is falling rapidly against the dollar, making domestic gains appear smaller on the world stage. India's new middle class, whose wealth has soared like never before after the pandemic, is wondering where it went wrong. Mr Modi will have to adjust his promises.
November brought the first nasty shock, when national statistics showed that annual growth in the economy had slowed to 5.4 percent over the summer. Last budget year, which ran from April to March, clocked in at 8.2 percent growth, enough to double the size of the economy in ten years. The revised forecast for the current fiscal year is 6.4 percent.
“It is a return to the trend,” said Rathin Roy, professor at the Kautilya School of Public Policy in Hyderabad. There was a brief period, twenty years ago, when India seemed on the verge of double-digit growth. But, Mr. Roy argued, growth depended on banks lending to businesses at an unsustainable pace.
Since the government removed large amounts of cash from circulation in 2016 in a vain attempt to rein in underground trading, the economy has never recovered, even at the 8 percent pace, according to Roy. Things only looked better, he said, because “you had the Covid dip, as happened in many economies. The Indian economy only returned to absolute size last year,” later than most other countries.
The reasons behind the delay are up for debate. One effect is undeniable: foreign investors are heading for the exit.
“Foreign investment has heeded the call that the Indian stock market is overvalued,” Mr Roy said. “It makes perfect sense for them to get out of the nasty emerging economies and put their money where they can make more,” such as on Wall Street, he added.
Investors who bought a broad mix of Indian stocks in early 2020 saw their value triple last September, as major market indexes hit record highs.
The number of Indians buying stocks grew even faster, helping to push up prices. Ahead of June's parliamentary elections, Modi's right-hand man, Amit Shah, predicted that India's new investor class would help their party to victory. During Mr. Modi's first two terms, the number of Indians with investment accounts rose from 22 million to 150 million, according to a study by Motilal Oswal, a brokerage firm.
“These 130,000,000 people will earn something, right?” Mr. Shah reasoned to The Indian Express, a newspaper. The new investors were clearly spending. The luxury sector and other luxury sectors did particularly well: cars more than motorcycles, high-end electronics more than household basics.
But that prosperity, concentrated among the top 10 percent, left the other 90 percent wanting more. Modi's party lost its majority in parliament, although it retained control of the government. Expanded benefits, such as the free wheat and rice that the government distributed to 800 million people, helped.
Despite such programs, the Modi government has been fiscally conservative and keeps a close eye on inflation. It has concentrated spending on expensive infrastructure facilities, such as bridges and highways, which should entice private companies to make their own investments.
Indian companies still face excessive red tape, political interference and other well-known problems. The Modi government has tried to reduce those burdens, but in recent years has focused on increasing economic supply.
For example, the Indian government is investing heavily in the construction of new airports. But the airlines that would serve them are pulling out. Holidaymakers who would have flown to beach resorts such as Sindhudurg, between Mumbai and Goa, are not buying enough tickets to keep a terminal open there.
Arvind Subramanian, an economist at the Peterson Institute for International Economics in Washington, traces the lack of demand to the broader employment situation.
“No jobs are being created, so people have no income and wages are low,” he said. There are not enough shareholders to make up the difference. The national minimum wage, which many workers in the informal economy never receive, is just $2 per day.
Mr Subramanian, who was the country's chief economic adviser during Mr Modi's first term, said the government is “outdated and bereft” of ideas to tackle such problems. “Ideas for long-term growth and boosting employment – that's what we're missing now,” he said.
He thinks the fall of the rupee is only natural and should have happened earlier. Until recently, the central bank spent billions of dollars to maintain the value of the national currency.
The psychological effect of a weakening rupee may be painful, but the cost of keeping it at a fixed exchange rate against the dollar was “extremely damaging to the national economy,” he said.
No one is happy when growth slows down. The government's current chief economic adviser, V. Ananta Nageswaran, told a news briefing in November that the bad news could be just fluff. “The global environment remains challenging,” he said, with a strong dollar and uncertainty about the possibility of sudden policy shifts in the United States and China.
A year ago, it was hoped that India's own economic engine could push the country through global headwinds. The missing ingredients start, just like now, with the fact that too many people have too little money on hand.
“There is simply not enough demand,” said Mr. Roy, the professor in Hyderabad. “The idea that you can expect supply to create its own demand has its limits,” he said.
“Ordinary people,” Mr. Roy said, say those between the top 10 percent who see big stock market gains and the bottom 50 percent who struggle to make ends meet still don't earn enough to buy basic necessities. About 100 million of these ordinary people qualify for free grain.
The government is expected to release a budget for the new financial year on February 1. Mr Nageswaran, the current economic adviser, has raised hopes that it could include tax cuts, putting more money into the hands of consumers.
“The idea that India needs tax cuts is completely wrong and inverse,” said former economic adviser Mr Subramanian. “Consumption is weak because incomes are weak.”
Last month, Mr Nageswaran told Assocham, a group of business leaders, that employers should pay their workers more, noting that wages were stagnating. “Not paying workers enough will ultimately be self-defeating or harmful to the business sector itself,” he warned.
