New Delhi (CNN Business)At the end of last year, India was still the world’s fastest growing major economy. It has since surrendered that title back to China, and its slump only appears to be getting worse.
Gross domestic product growth fell to a five-year low of 5.8% in the first quarter of 2019, and economists surveyed by Reuters predict data due Friday will show another drop in the second quarter. India’s automotive industry has already shed hundreds of thousands of jobs, and consumer goods companies like Unilever (UL) are reportedly slashing prices because of slowing demand.”It is definitely a slowdown,” said Anuradha Saha, a professor of economics at Ashoka University, describing the situation as “grave.”Quick fixesThe government has scrambled to boost the economy. Last week, India unveiled tax breaks for startups, cheaper home and car loans, and an injection of 700 billion rupees ($9.8 billion) into state-run banks, among other measures. Read MoreA few days later, it followed with an announcement that rules on foreign investment would be eased, opening up India’s huge coal industry. It also said it would relax local sourcing regulations that have blocked companies like Apple (AAPL) and other global retailers from opening stores.But those short term solutions may not do enough to address deeper concerns about India’s economic health.Read more on India
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“These are what I would call slightly quicker fixes for boosting growth,” said Shilan Shah, senior India economist at Capital Economics. Without other changes, they risk a spike in inflation if demand outpaces supply, he added. One of India’s most urgent needs is to reform its labor market, according to Saha of Ashoka University. Changes in labor rules that would make it easier to hire and fire workers — touted since Prime Minister Narendra Modi was first elected in 2014 — have not happened. Meanwhile, unemployment is at its highest level in decades. “Possibly the government is looking for quick fixes, and [foreign investment] seems like a very quick fix but it’s not going to solve the long-term problem,” Saha said. Raiding the reserves The government this week also got a bit more firepower from India’s central bank to fight its economic battle. The Reserve Bank of India, which has cut interest rates four times this year, announced Monday that it would transfer excess reserves of 1.76 trillion rupees ($24.5 billion) to the government. The decision comes months after the bank’s former governor, Urjit Patel, abruptly quit after reportedly pushing back against the government over using central bank reserves to boost growth. The government replaced Patel within barely 24 hours with Shaktikanta Das, a former finance ministry official, prompting questions about the central bank’s autonomy. Saha, the Ashoka University professor, says more coordination between the central bank and the government is essential to a “well-functioning economy,” but all eyes will now be on how the money is used. “If the slowdown is as serious as we see, asking for the RBI’s help is a prudent measure,” she said. The man who tried to unite India's fragmented economy has diedBut the central bank’s intervention reignites questions about its independence and whether it could be forced to focus on boosting the government’s growth credentials rather than the long term health of India’s economy. “It’s a fairly worrying sign, on top of everything else that’s been happening,” said Shah, the Capital Economics analyst. “It’s quite clear that the government has strong-armed the [central bank] into handing over money.” While the transfer to the government still leaves the central bank with plenty of capital, it could set a dangerous precedent. “Once the precedent is set, there’s nothing to stop the government from raiding the RBI again and again and again,” Shah said.