India falls behind China in economic growth, and PM Modi should be worried

It’s been a good amount of time that we have been used to of calling India as world's fastest-growing large economy. However, this notion has now become a thing of the past, since the latest data on economic growth show that even though for last fiscal, India’s economic growth stood at a respectable 7.1%, these numbers have benefited from a change in how inflation is measured.

The real growth for the fourth-quarter GDP growth of Indian economy was 6.1%, behind that of China.

This means that India is no longer the fastest-growing large economy in the world, and the government, including PM Modi would need to think of a new line to begin their speeches to lure the world to invest in India.

The reason behind this could be said to be demonetisation, after which Modi government withdrew 86% of India's currency from circulation. Manmohan Singh, who had served as India’s PM prior to Modi had said in the Parliament that this move might dent economic growth by two percentage points or more, and looks like that estimate has come true.

However, what's more worrying is that demonetisation isn’t the only reason behind this rate of economic growth. Numbers have shown that the economy had started to plummet well before that.

Since last spring, growth in gross value added, which is output as measured from the economy's supply side, has been slowing down continuously every quarter, from 8.7% to 5.6%.

The biggest problem with the Indian economy right now is that nobody is investing, even after lengthy speeches made about how India was the world economy's sole bright spot.

Another reason is that the government has not done anything substantial to tackle the bad debt problems faced by Indian banks.

Since a major part of Indian investment comes through bank loans, and banks are reluctant to lend, this too has become a cause to worry.

Even when banks are willing to lend, they don’t find too many takers since companies complain that RBI is keeping real interest rates too high.

The finance minister held a press conference after the release of GDP data, and said that the economy has grown very well. He also highlighted the troubles it inherited, and cited the poor monsoons that it had to deal with.

However, when Modi took office in 2014, the economy was tracking upwards, with a turning business cycle, easing commodity prices, and increasing growth.

The government has gone wrong, as per Bloomberg, with its lack of focus, a shortage of ambition and misplaced priorities.

The mere fact that India needs a deeper reform than just attracting investment can’t and shouldn’t be overlooked.

If Modi doesn’t start to realise the gravity of the situation and do something about it swiftly, his confidence of an easy re-election in 2019 might be in danger.