Few economies have pivoted from zero to hero with the head-turning speed that Narendra Modi’s India just did.

Six weeks ago, the India of the outside world’s imagination was a Covid-19-ravaged shambles. Now, it’s booming to the tune of 20.1% growth. That’s the rate at which India’s gross domestic product grew from April to June year on year.

That impressive figure was no typo. But it’s also not the V-shaped recovery it may appear to be.

For one thing, India still remains underwater relative to where it was in pre-pandemic 2019. For another, there’s a number that matters far more: 2,657.

The reference here is to how many days Prime Minister Modi has been in power. The 87-plus months Modi has held the reins ought to have been ample time to put in motion the structural reform “Big Bang” he promised voters back in 2014.

Mostly, though, Modi spent these last seven years and three months thumping his chest and spinning his few modest successes.

To be sure, Modi put some reform wins on the books. He opened a few key industries wider to foreign investors, including aviation, defense and insurance. Overseeing the passage of a national goods-and-services tax in India is no small feat. And his three-pronged agriculture reform laws, at least on paper, aim to modernize the laggard sector.

But Modinomics has not been the game-changer voters were promised. Far from it.

Modi rose to national attention on the strength of his 13-year stint running the western state of Gujarat. There, Modi became a folk hero for his reputation of producing faster GDP growth, better infrastructure and lower rates of corruption than the national average.

Unfortunately, Modi seemed to have left his reform toolkit back in Gujarat. In the capital, he has spent more time and energy talking up his Hindu nationalism than acting to modernize a rigid and uncompetitive economy.

An unemployed youth fills an application form to access job openings in the private sector outside an “employment van” during an initiative by TMI foundation and Hyderabad city police, in Hyderabad on August 25, 2021. Photo: AFP / Noah Seelam

Rigidly uncompetitive

One big problem which Modi has largely punted: bad loans undermining the state bank sector. It wasn’t until July, for example, that India set up a “bad bank” to address, finally, one of the globe’s biggest piles of soured debt.

While a work in progress, Finance Minister Nirmala Sitharaman has explained it as such: the “bad bank” will be owned by a hybrid government-run/private sector model allowing financiers to transfer as much as $27 billion of non-performing loans.

Investors will just have to wait and see, though, if this is merely a ploy to warehouse and hide debt or a sincere attempt to put the overall financial sector on sounder footing.

Worse, New Delhi’s renewed effort to pump more credit to small borrowers may just increase the number of bad loans, warns Rakesh Mohan, an ex-deputy governor at the Reserve Bank of India.

The plan extends about $62 billion in emergency credit and loan guarantees as Covid-19 decimates the nation’s customer base. Mohan and other experts worry it will end up furthering eroding asset quality across the economy.

“We don’t know the actual impaired assets in the banking system, which are bound to be significant,” Mohan says, adding it’s “an area of concern” the central bank must “watch very carefully.”

A malfunctioning banking system is a headwind that Modi’s government has not been able to overcome with conventional stimulus. The details of the latest GDP report makes that painfully clear, says economist Prakash Sakpal at ING Bank.

“Despite a much-flaunted fiscal boost to the economy, government consumption was missing in action in the last quarter,” Sakpal says.

Carrying this message forward, Sakpal says, the budget data for July showed a sharp fall in the fiscal deficit to $6.4 billion from $20.5 billion in June, putting the cumulative deficit in the first four months of this fiscal year to 60% below the year-ago level.

A money lender counts Indian rupee currency notes at his shop in Ahmedabad. Photo: Reuters/Amit Dave
A moneylender counts Indian rupee currency notes at his shop in Ahmedabad. Photo: Agencies

To be sure, says economist Rahul Bajoria at Barclays, “the economic damage appears to be less than previously expected,” even if India’s second Covid-19 wave, “acted as a stumbling block to the robust recovery that was underway.”

But the economy would be looking at a far more robust 2022 if the government hadn’t declared victory against the pandemic too soon. And if Modi had tended to India’s pre-existing conditions before the pandemic hit, the economy would be more resilient.

In January, Modi’s delivered a “how-India-defeated-the-pandemic” speech at the United Nations. That has since aged very poorly as Covid-19 tears through the world’s second-most populous nation.

Even for a big talker like Modi, it’s hard to spin away piles of bodies being burned on streets, overwhelmed hospitals, depleted oxygen supplies and slow vaccination rollouts.

India’s Covid crisis could be seen as a microcosm of Modi’s blusterous leadership style.

After putting some modest reform tweaks on the scoreboard, he pivoted into permanent campaign mode.

Bharatiya Janata Party (BJP) supporters wearing face cutouts of Indian Prime Minister Narendra Modi attend a public rally being addressed by him during the fourth phase of the West Bengal’s state legislative assembly elections, at Kawakhali on the outskirts of Siliguri on April 10, 2021. Photo: AFP / Diptendu Dutta

He prioritized massive rallies over negotiating with lawmakers to celebrate his “Make India Great Again” movement. In 2019, the year he won a second term, Modi even did a joint rally with then-US President Donald Trump in Texas. Thousands of Indian diaspora thundered their approval.

Back home, though, Covid risks are thundering away all else. The problem with GDP reports is that they’re backward-looking – particularly when rolling pandemic lockdowns are at play.

As economist Aditi Nayar at data provider ICRA points out, demand for oil and non-oil exports is losing momentum as the Delta variant spreads. That could augur poorly for the next quarter.

Economist Nikhil Gupta at Motilal Oswal Financial Services notes that attention is quickly shifting to the period since July and the “base effects” that make 2021 bumpy. 

Gupta figures real GDP will weaken to the 7% to 8% range – and end up down 9% in fiscal 2022 overall.

recent India Today poll found that Modi’s approval rating plunged 42 points over the last year – to 24% from 66% amid record Covid inflections and deaths (more than 439,000). While Modi has three years left in office, such numbers may limit the political capital his government needs to raise the nation’s competitiveness.

No Covid mercy

India isn’t the only Asian economy with pre-existing conditions that Covid is ruthlessly exploiting, though it is the most extreme case.

“The economic costs of resurgences remain most prominent in the Asia-Pacific region,” says Shahana Mukherjee at Moody’s Analytics. “Strong resurgences driven by the highly transmissible Delta variant have resulted in tighter restrictions being imposed in Japan, South Korea, and most of Southeast Asia. Previously well-guarded countries such as China and Australia are also in the fray, with millions placed under new lockdowns.”

The challenges to Asia’s recovery are “varied and evolving,” Mukherjee says. In severely impacted countries such as Malaysia and the Philippines, restrictions have lacked effectiveness in containing outbreaks, thereby mandating an extension of inhibiting curbs.

While others such as Indonesia have adopted a less conservative approach, there is a real risk that the economic costs of relaxing restrictions too soon may significantly outweigh the short-term gains from re-openings.

Men stand near burning pyres of victims who lost their lives due to the Covid-19 at a cremation ground in New Delhi on April 26, 2021. Photo: AFP / Jewel Samad

“In comparison,” Mukherjee says, “although India’s intense second wave has continued to settle, risks of an impending third wave remain pertinent and could result in a staggered revival over the next few quarters.”

An upshot is that the latest resurgence has expedited the pace of vaccinations across most Asian economies. But even with this step-up in momentum, Mukherjee says, policy shifts in vaccine preference and supply issues are significant binding factors that will moderate the region’s progress and delay the timing of reaching herd resilience.

And in the case of Modi’s India, it will delay the timing of even a U-shaped revival – never mind the V-shaped one Modi is trying to spin.