Most India observers figured Narendra Modi would feel emboldened after winning a second term as prime minister in May. Very few would have guessed that confidence would have him revoking Kashmir autonomy with zero warning.
Understandably, the move is being viewed through a geopolitical lens. Diplomatic earthquakes always are, and fast-escalating tensions with Pakistan give world markets yet another huge risk to ponder.
Yet the financial lens may offer the better vantage point. Modi’s gamble, after all, is as much a cry for economic help as an announcement of any new authority he has amassed.
The surprise interest-rate cut by the Reserve Bank of India was indeed a distress signal. The central bank’s fourth reduction this year – and at 0.35 percentage point a large one, comparatively – put the benchmark rate at a nine-year low.
It spoke to the level of distress in Asia’s third-biggest economy. Distress that perhaps only a bold, headline-grabbing gesture on the world state might eclipse in the national conversation.
This slowing-growth narrative isn’t going away. Business investment has stalled, while bank and non-bank lending to companies and households slowed to a crawl. Consumers are reining in spending, a dynamic that depressed growth to a five-year low of 5.8% in the first quarter. Unemployment is at a multi-year high. Auto sales cratered about 30% in July — 48% at Honda Motor alone.
Though India’s role in supply chains is less direct than those of South Korea and Taiwan, trade-war headwinds are bearing down. Equally problematic, many economists question whether things were ever as good as the average 7% Modi’s government claimed in its initial five-year term.
At issue: concerns that holes in key data sets used to calculate GDP figures overstate growth. India has faced its fair share of statistical skepticism in recent years. But when Arvind Subramanian, a former International Monetary Fund staffer who until last year was Modi’s chief economic adviser, raises questions, investors took notice. He claims growth in Indian gross domestic product has been averaging closer to 4.5%.
All this is a blow to the Modinomics myth the government spun to win re-election. Modi’s initial appeal to India’s 1.3 billion people was his perceived success running the western state of Gujarat. That period, from 2001 to 2014, is associated with rapid and efficient growth. Voters hoped Modi would supersize that feat, imposing it nationally.
Modi has his reform wins. They include opening the aviation, defense and insurance industries to greater foreign investment. Modi also signed into law a national goods and services tax (GST).
But too many of his upgrades are of the low-hanging-fruit variety. Modi trod carefully on opening retail and the really controversial reforms to laws on labor, land and corporate taxes. The glacial pace of bold change is boomeranging back New Delhi’s way as the trade war slams world growth.
Because India is less reliant on exports than most Asian peers, growing faster and more efficiently means structural changes. So far this year, though, Modi has outsourced economic management to the central bank. In fact, he’s already on his third RBI governor. The first two, Raghuram Rajan (2013-2016) and Urjit Patel (2016-2018), were deemed too stingy with monetary stimulus. Modi’s latest, Shaktikanta Das, has been on a rate-cutting tear.
Getting growth to 7%, and for real, requires serious heavy lifting on the supply-side of the policy ledger. That includes cleaning up a bad-loans mess at state banks. But Modi’s Kashmir gambit, coupled with his reliance on lower rates, augurs terribly for Modinomics flourishing.
Until now, critics thought Modi was using a splashy economic program as cover for taking his brand of Hindu nationalism. In annexing Kashmir and Jammu, though, Modi may be flipping the script.
As a headline in the latest issue of Foreign Policy put it: “Kashmir is a dress rehearsal for Hindu nationalist fantasies.” Like Donald Trump in the US, Modi has pivoted to destroying norms and fanning ethnic and religious tensions for short-term political gain.
Modi is making a huge geo-strategic mistake by stripping Muslim-majority states of autonomy. His argument that pulling Kashmir into the rest of India creates economic opportunity is hollow spin. In reality, he is provoking and stifling about 7 million people. Modi is lighting a fuse, not lighting up growth.
Indians hoped he’d do just that nationally. There is still ample time, of course. Over the next 58 months, Modi can indeed shift his economic reform drive out of first gear. But his Kashmir detour isn’t just a distraction. It’s a sign Modi is deflecting attention away from an economy that was supposed to be his ticket to greatness.
Observers wondering what, oh what, Modi may find more answers exploring the why. And here, the economic fingerprints, and implications are impossible to miss.