World Economy

Risky Drop in Demand Clouds Indian Outlook

Risky Drop in Demand Clouds Indian OutlookRisky Drop in Demand Clouds Indian Outlook

Consumption was India’s big story. Its 1.3 billion population was expected to guzzle everything from iron to iPhones, driving global growth and cheering investors such as Apple Inc. and Goldman Sachs Group Inc.

For a while everything seemed smooth. Indians were the world’s most confident consumers and the $2 trillion economy was the fastest-growing big market. Then, last November, Prime Minister Narendra Modi took away almost all their cash, worsening a slowdown that had started earlier in the year. Climbing global oil prices and a tightening Federal Reserve could also complicate domestic policy making, Bloomberg reported.

“There are a number of uncertainties which are clouding the short-term outlook of the Indian economy,” said Kaushik Das, Mumbai-based chief economist at Deutsche Bank AG. “Risk of policy error remains high.”

Consumption: Indians fell off the top of Mastercard’s Asia Consumer Confidence Index in the first half of 2017, and a report from the nation’s central bank last week confirmed the bleak outlook. About 27% of Indians surveyed said incomes have fallen, pushing overall sentiment into the “pessimistic zone.” Employment “has been the biggest cause of worry,” the Reserve Bank of India said.

Jobs: Convincing Indians to consume would first require assuring them they’ll have a job. It won’t be easy for Modi to do so. Manufacturing jobs are forecast to fall about 30% this year and broader surveys show the hiring outlook is near a 12-year low.

Investment: The jobs scenario is gloomy because companies—bogged down by bad debt and poor demand—aren’t building more factories. Projects worth 512 billion rupees ($7.8 billion) were completed between July to September, the lowest since Modi came to power in 2014, according to data from the Mumbai-based information company Center for Monitoring Indian Economy.

The value of fresh investment proposals from the private sector fell to the lowest in 15 quarters and in terms of absolute number of proposals this is the lowest in 13 years.

Loans: Some economists, such as Abhishek Gupta at Bloomberg Intelligence, say that high real rates are impeding private investment and increasing non-performing assets at banks. This inhibits lending, even to credit-worthy customers, keeping loan-growth near levels last seen in the 1980s.

Stressed corporates could derail the overall investment recovery for another two-to-three years, given they are using only 40% of capacity, according to India Ratings & Research, the local unit of Fitch Ratings.

“The Indian private sector regained some lost ground,” Aashna Dodhia, economist at IHS Markit, wrote in an Oct. 5 report.

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