Indian Prime Minister Narendra Modi faces enough problems supporting a flagging economy as his second term begins. Yet he now confronts questions about whether growth in the first was nearly as strong as official figures claimed.
Modi's first term, from 2014 to 2019, brought India a growth spurt in gross domestic product of 7%-plus each year, capturing the imagination of investors around the globe. Steps to open protected sectors -- aviation, defense and insurance -- pushed foreign direct investment to more than $60 billion in 2017-18, from $45 billion three years earlier.
The second term, though, is beginning with a hangover. Growth is slowing sharply, much lower than expected at 5.8% in the first quarter. Unemployment is now at a multiyear high. And a near 16% fall in car sales in June has economists speculating about bigger downward movements to come.
Yet the biggest credibility question facing Modinomics comes as economists debate whether things were ever as good as Modi claims.
One, in particular, is making headlines: Arvind Subramanian, a former International Monetary Fund staffer who until last year was the Modi government's chief economic adviser. Subramanian has claimed Indian GDP growth averaged closer to 4.5% between 2012 and 2017, not the average 7% range official data suggest.
Subramanian's doubts centered on changes to the way New Delhi incorporates manufacturing output into top-line GDP. He found a "deep puzzle" presented by rapid national growth that does not jibe with actual trends in investment rates, exports, corporate profits, credit financing and "probably" consumption, too.
Arvind Subramanian found a "deep puzzle" presented by rapid national growth.
© Reuters
How, for example, did India grow above 7% in 2016 after the government's chaotic move to pull all high-denominated currency bills out of circulation? A similar question could be asked about as U.S. President Donald Trump's trade war upended global supply chains in 2018.
The bottom line, Subramanian said, is that Asia's third-biggest economy is advancing "solidly but not spectacularly."
This is not the first time New Delhi has faced doubts about data, more familiar to China-watchers querying Beijing's figures. A 2015 move to revise GDP figures higher inspired some headshaking. India's employment data have long raised questions. Investors suspect state-owned banks have far more bad loans than official figures admit.
More and more foreign outfits, including Goldman Sachs and Nomura Holdings, are devising their own models to advise clients on India's zigs and zags. In January, for example, Nomura questioned the conventional wisdom that India will easily overtake the U.K. to become the world's fifth biggest economy.
Team Modi is working feverishly to dismiss Subramanian's assertion, although its place of publication seems to support him too. That Harvard's Center for International Development would circulate such a report has forced Modi's inner circle to respond. Modi's Economic Advisory Council says doubts about GDP "would not stand the scrutiny of academic or policy research standards" and lack "rigor."
If Subramanian's is right, it would mean "any company, any investor" might have to rethink the trajectory of India's economy, said Rakesh Mohan, a former deputy central bank governor.
That goes doubly for Modi's much-celebrated reform drive. The data-accuracy debate is a microcosm of concerns that Modi's revival plan is less about structural change than pumping up GDP.
Granted, Modi has put some important wins on the scoreboard. Along with increasing foreign-investment quotas, the 2016 passage of a national goods and services levy was a big deal. It was the biggest tax reform since 1947, meant to increase efficiency and reduce opportunities for graft.
In just two years between 2017 and 2019, India's ranking in World Bank's Ease of Doing Business survey jumped 53 places to 77th. Yet Modi largely coasted over the last couple of years. He shelved the more audacious upgrades he telegraphed in 2014: revising labor, land and corporate tax laws. Big talk of opening the retail sector to global operators amounted to little.
Nor have deregulatory pledges kept pace with Modi's "Make in India" plan to siphon factories away from China. Take foreign-direct investment, touted by Modi boosters as a big success. According to the World Bank, FDI into India was just 1.5% of GDP in 2017 versus 6.3% in Vietnam and 3% in Malaysia.
Earlier this month, finance minister Nirmala Sitharaman outlined new tax incentives for global technology companies. The hope is to increase India's share of solar panel, semiconductor and smartphone manufacturing. Modi's government also plans to convene summits with overseas tech gurus to win their trust.
India, though, needs to get the basics rights, too. Chronic shortfalls in domestic savings and investment leave it too reliant on global capital, and vulnerable to cash leaving when global markets grow turbulent, as they are today.
The last thing New Delhi needs in 2019 is doubts about its data ecosystem. India is gearing up for its first-ever sovereign bond offering in overseas markets, one that could raise $10 billion. Any uncertainty about the economy or transparency could hamper demand.
Modi 2.0 should make full transparency a top priority. And that means ensuring investors trust the numbers. Granted, coming up with a GDP snapshot every few months capturing the collective experiences of 1.3 billion people is a herculean task. The vastness of India's "informal economy" makes it even harder. A 2017 study by the Association of Chartered Certified Accountants estimated it is 17% of GDP.
More money might help. Among Subramanian's main gripes is that New Delhi spends just 0.2% of its annual budget collecting data. India has not got around to releasing regular figures on retail sales, housing or other vital sectors.
That leaves analysts to fill the void combing data on electricity use, freight and transportation trends, sales of cars and scooters, credit shifts and corporate investment decisions. Or, coming up with their own.
In May, the prime minister, recently reelected, said: "This is not a victory of Modi, it is the victory of people who are desperate for honesty in the system." What better place for Modi 2.0 to start than building trust in the numbers underpinning it?
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."
