India’s economy grew just 5 per cent year on year between April and June, the fifth consecutive quarter of deceleration, as companies and consumers suffering from an acute credit squeeze tightened their belts.

The grim figures, which fell far short of analysts’ expectations, were down sharply from the 5.8 per cent expansion recorded in the previous period, and down from 8 per cent in the same quarter last year.

The sluggish pace — the slowest growth in six years — highlights the depth of the malaise that has gripped a country that not long ago had revelled in its status as the world’s fastest-growing large economy. It also illustrates the severity of the challenges confronting prime minister Narendra Modi just months after his landslide re-election victory in May. 

While campaigning, Mr Modi boasted of presiding over the fastest economic expansion in India’s history, though many independent economists raised doubts about the credibility of the statistics on which he based his claim. 

But India’s deteriorating economic picture over the past year has become increasingly hard to ignore. Elite business groups are pessimistic and are holding off on investment, while households have been cutting spending as job losses mount. 

“This government has not been able to generate any hope that the next five years will be better than today,” Sunil Kumar Sinha, principal economist at India Ratings & Research, said this week. “The first thing the government must do is change the sentiment.” 

Private consumption — the main engine of growth in India in recent years — grew just 3.1 per cent year on year between April and June, down from 7.2 per cent in the first three months of 2019. 

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Manufacturing output growth tumbled to just 0.6 per cent year on year, compared with a 12 per cent increase in the same period last year, while agriculture grew 2 per cent year on year, compared with 5.1 per cent last year. One of the strongest drivers of growth was government spending, which rose by 8.5 per cent year on year. 

Rashesh Shah, chairman and chief executive of financial services group Edelweiss, said he hoped the data would serve as a wake-up call to the government and encourage it to embark on structural reforms. 

“I hope this will spur the government to really think of out-of-the-box actions,” he told a local TV channel. “Government may not step up on the fiscal stimulus very quickly, but they have a lot of other things they can do.” 

Over the past week New Delhi has taken a series of steps to give a fresh impetus to growth and woo fresh foreign investment. 

On Friday, finance minister Nirmala Sitharaman announced that the government was merging 10 public sector banks into four larger entities, with smaller, weaker lenders pushed into stronger, larger groups in the hope of bolstering the state-dominated financial system. 

Earlier this week, the cabinet eased local sourcing requirements for foreign, single-brand retailers such as Ikea and Apple, and permitted them to start ecommerce platforms before opening bricks and mortar stores. 

New Delhi is lifting a ban on government agencies buying new vehicles to replace their ageing fleets, and accelerating tax refunds to small businesses. 

But even with this week’s $25bn windfall from the Reserve Bank of India, analysts said that New Delhi had limited fiscal space for more stimulus measures, while the latest data are likely to raise further questions about the realism of the government’s revenue-collecting targets.

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Economists believe more profound reforms, including large scale disinvestment of government assets, will be needed. 

“Unless they tackle some of the structural issues, the band-aid kind of announcements are not going to make much of a difference,” India Ratings’ Mr Sinha said.

Via Financial Times