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India Loses Title as World’s Fastest-Growing Big Economy

India’s gross-domestic-product expansion dipped below 6% last quarter, forcing the country to surrender its title as the world’s fastest-growing large economy as citizens and companies held back on spending.

The GDP of Asia’s third-largest economy climbed 5.8% in the three months through March, putting it behind China’s 6.4% growth for the same period. India still grew more than China for the full calendar year last year and is expected to outpace China eventually this year as well.

For the full fiscal year that ended March 31, India’s economy expanded 6.8%, its slowest since the year ended March 31, 2014.

Prime Minister Narendra Modi, who was sworn in Thursday for his second term, now has to figure out how to deliver on his economic promises to the people who voted him back into power by a surprisingly wide margin. Mr. Modi and his cabinet, which was announced Friday — will need to do more to unleash the growth potential of the South Asian nation.

“He has a great mandate; now, what is he going to do with it?” asked Andrew Holland, a Mumbai-based chief executive at hedge fund Avendus Capital Alternate Strategies. “He is going to want to leave a legacy.”

India’s economic outperformance hit some bumps in the past year in the form of growing bad-debt worries, escalating trade tensions and a struggling agricultural industry.

Consumer and corporate confidence have been dwindling. Companies’ profit growth has been unimpressive, and people across the country are complaining that the economy isn’t creating enough jobs to employ the millions of people who enter the workforce every year.

With the ruling Bharatiya Janata Party and its allies now in control of close to two-thirds of the lower house of parliament, Mr. Modi is in a position to take some bold moves to bolster the economy.

Some basic deregulation, such as making it easier for companies to buy land and fire employees as well as untangling agriculture from regulations that restrict prices and supply, could help growth take off, economists say. India needs annual growth of 10% for several years — the kind of growth seen in other Asian economies — to really upgrade the standard of living of its 1.3 billion citizens.

During his first term, Mr. Modi proved reluctant to push through unpopular economic changes. While some investors and company executives were disappointed, Indian voters were less concerned about the evolution of the economy and still showed with their votes that they think Mr. Modi is still the best leader to help India.

Economists and investors say the national budget, expected in early July, will be one of the biggest indicators of the BJP’s plans.

Shilan Shah, a Singapore-based India economist at Capital Economics, said Mr. Modi’s new finance minister, Nirmala Sitharaman, “faces a delicate balance.” She will be tempted to ratchet up spending to turbocharge growth. However, if she does that she could lose the confidence of international investors, because it would mean India is falling short of its pledge to reduce its fiscal-deficit-to-GDP ratio.

“She will have her work cut out in her new role,” Mr. Shah said in a report Friday.

In the meantime, many economists foresee more pressure on India’s central bank, the Reserve Bank of India, to lower lending rates.

“When the government wants the RBI to reduce interest rates because it’s required for the economic development and growth of the economy and the country, the RBI cannot just say, ‘We can only focus on inflation,’ ” Gopal Krishna Agarwal, the BJP’s national spokesman for economic issues, said in an interview this week.

The next Reserve Bank of India meeting to consider rates will be next week. It has reduced rates two times already this year, but with inflation at comfortably low levels it may have some space to cut again, economists said.

Mr. Agarwal said that to help growth, the government was planning to boost spending on infrastructure, further reduce the number of regulations and the amount of paperwork needed to run a business, and lower average corporate tax rates to 25% from around 30% now.

The government also released unemployment figures Friday, which had been at the center of debate during the elections. It said the unemployment rate in the year through June was 6.1%.

That figure was leaked to media early this year as one senior statistician quit his job saying the government was refusing to release it. Critics of Mr. Modi took the number as proof of a jobs crisis, because the official unemployment number had been below 3% for decades.

India’s chief statistician, Pravin Srivastava, clarified to journalists Friday that any comparison to earlier unemployment numbers was incorrect as the methodology of calculating the figure had been revamped.

“It’s a new survey. It will be unfair to compare it with the past as we have used new methodology,” he said. “There was no [political] pressure at all. It’s a scientific analysis.”
Source: Dow Jones

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