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Opinion

2020 look ahead: Politics and protectionism to dominate Indian economy

Slowing growth needs corporate kick-start, but Modi only offers distractions

| India
Narendra Modi has embarked on implementing his party's core political projects and he will continue on this track in 2020.   © Reuters

India's current slowdown is largely of the government's own making. The surprise cancellation of $218 billion in rupee notes in 2016 ruined the prospects of the rural economy and businesses in the informal sector. The badly designed and poorly implemented goods and sales tax, or GST, led to a compliance nightmare which is suffocating smaller businesses in the formal sector.

Heavy indebtedness has been forcing large corporations to hold back their capital expenditure plans, and only one of the country's four growth engines is firing at the moment. India even walked away from the pan-Asian Regional Comprehensive Economic Partnership, or RCEP, trade deal, which made both commercial and strategic sense.

But instead of correcting these errors, the charismatic Prime Minister Narendra Modi, emboldened by his massive victory in May's general elections, has embarked on implementing his party's core political projects -- and he will continue on this track in 2020.

Over the summer he scrapped article 370 of the Indian constitution, which conferred special status to Jammu and Kashmir. He is also establishing a register of Indian citizens, which is aimed at identifying illegal immigrants but which will discriminate against Muslims and the secular fabric of Indian policy, critics fear.

Government expenditure is the sole sector supporting India's weak GDP growth -- which fell from 8% in 2018's second quarter to 4.5% in the July-September quarter of 2019 -- but there is only so much it can do. Deteriorating tax collection in a weakening economy means even this will slow, and shortfalls in GST collection are already taking a toll on states' finances.

The states, which in 2019 added regulatory risks by starting to renege on contractual obligations, will continue to make their business environments less attractive by adopting sons of the soil measures, which reserve jobs for locals, to divert attention away economic mismanagement and keep their core political constituencies happy.

The finance minister has hinted that the government is contemplating a reduction in personal income taxes to give a boost to consumption, the backbone of the Indian economy. However, given the pressure to contain the fiscal deficit, it cannot be anything other than a superficial cut.

The tight jobs market and a credit crunch in the shadow banking space will hold back the revival of consumption demand even in 2020. With slowing growth and sluggish domestic and export markets, China will continue to offload its excess manufactured goods, such as steel and textiles, on to Indian markets. That will keep India's trade deficit with China high.

Consequently, India Inc. will demand more protection from imports. In 2020 one can expect further restrictions on foreign companies -- especially those engaged in e-commerce -- perhaps relating to the storage of data locally, after restrictions on pricing freedom in 2019. Investors should also be prepared for more harassment by tax officials given the pressure to fill the government coffers.

Distracting from economic woes, the Modi government will be tempted to implement its disruptive political projects such as the National Register of Citizens for the whole of India. This will create large-scale social and political chaos, increase communal tension and damage India's reputation as a secular country that does not discriminate on the basis of religion.

Supporters of ruling Bharatiya Janata Party shout slogans during a march in favor of a new citizenship law in Kolkata on Dec. 23: there is political profit for Modi in attacking Muslims.   © Reuters

His amendment of citizenship laws, aimed at granting Indian citizenship to non-Muslim refugees and illegal immigrants from Afghanistan, Bangladesh and Pakistan, has prompted strong nationwide protests and opposition ire. But there is political profit for Modi in attacking Muslims at home and abroad.

The Modi government has already deprived Muslim-majority Jammu and Kashmir of its special status and split it into two union territories, a proxy for rule by the federal government in New Delhi. The state's leaders were arrested and internet services were suspended.

Similarly, the Modi government has made it clear that Pakistan will face retaliatory strikes or limited war if it does not prevent attacks in India. New Delhi will not hesitate to take action as there is widespread support for this among Indian voters.

Unless urgent corrective measures are taken, the country is headed for a major economic crisis of its own making. It is not that nothing can be done to tackle the situation. Rather, it seems there is a lack of genuine interest or political will on the part of the current regime to deal with the economic mess.

With a weak and uninspiring opposition, the Modi government seems confident about holding on to power irrespective of how the economy does. That should be the real worry in 2020.

Ritesh Kumar Singh is chief economist of Indonomics Consulting and a former assistant director of the Finance Commission of India.

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