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Becoming the next China won’t slow India’s slowdown in 2023

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It is not immediately apparent that the global slowdown has arrived in India: investment in factories, roads and other physical assets accounts for almost 35% of domestic production; They haven’t been this high in 10 years. Demand for credit is growing so fast that deposits cannot keep up.

What drives India’s animal spirits amid a global malaise? Part of this is the result of the full reopening of the economy. Contact-based services like travel and hospitality rebounded significantly from their pandemic funk in the first half of the year, fueling optimism. The other often-cited reason is what multinationals refer to as their “China+1” strategy.

Global manufacturers have taken note of violent protests by locked-in workers at Apple Inc.’s main iPhone assembly plant in China. Their quest for risk reduction leads them to the second most populous nation, which offers generous subsidies for everything from semiconductor and solar panel manufacturing to batteries and textiles for electric vehicles. It’s a winning combination of push and pull.

But China+1 will not be of much help in averting a near-term economic slowdown. On the one hand, the federal government pushed ahead with the investment ramp-up. Sustained above-target inflation provided it with additional tax revenue and pumped it into infrastructure. The private sector followed suit, despite facing a margin squeeze as it could not fully pass on higher costs to consumers. India’s banks, eager to boost their asset books post-pandemic, have been more than willing to help companies weather their liquidity crunch. As a result, combined capital spending by federal and state governments and large listed companies this fiscal year could exceed Rs. 21 trillion ($258 billion), which is double the annual investment rate between 2016 and 2018, according to ICICI Securities.

However, this happy story has a downside. Now that pent-up consumption has been exhausted by the pandemic, the double whammy of high inflation and indirect taxes – the source of buoyant government revenues – is beginning to weigh on middle- and low-income households.

Nomura’s consumption tracker fell from 11 percentage points above its pre-pandemic level in the June quarter to below that level in October. It’s hard to see 2023 as a great year for the urban middle class as global layoffs in the tech industry hurt jobs and the availability of capital for startups. According to consumer goods companies, rural demand is already sluggish. “We believe India’s growth cycle has peaked and a broad-based slowdown is underway,” Nomura analysts wrote last week after gross domestic product grew 6.3% in the September quarter, less than half the growth rate in previous ones three months. According to their estimate, the full-year rate could be 5.2% on the eve of India’s general election in the summer of 2024.

Excluding the pandemic years, this will be the country’s second-worst economic growth rate in more than a decade. It will call into question Prime Minister Narendra Modi’s expensive industrial policy push. The country needs more public spending to reduce severe student learning deficits caused by Covid-19, close large public health gaps and combat climate change.

Those challenges are immediate, while the supply chains that India plans to build from the ground up by throwing subsidies at investors — and offering them the protection of high tariff barriers — are a long-term gamble. Only 15% of the $33 billion in private investment approved by the government under its manufacturing-related stimulus program has borne fruit so far; fewer than 200,000 jobs were created through September, compared to expectations of around 6 million, according to official data quoted in an article on Quint, a news website. Even if the West’s alienation from China deepens, or if the much-anticipated end of President Xi Jinping’s Covid-19 policies is postponed, there is nothing to suggest that private investment will benefit India much over the next year.

That’s also because exports from most Asian suppliers are slowly slowing: shipments from India hit a 20-month low in October. The latest GDP data shows clear signs that the country’s industrial sector is losing momentum. The unemployment rate has risen to 8%.

The political script for New Delhi seems pretty flimsy. Yes, local interest rates will peak in early 2023, but not before aggregate tightening surges above 2 percentage points in the current cycle. Financial conditions could get even tougher. If the war in Ukraine escalates — or if China suddenly drops its stringent virus controls — commodity shortages relative to demand could flare up again. This will squeeze cash flows for Indian firms and encourage more of them to seek external financing to meet their heavy working capital needs. Banks, which are under pressure to raise deposit rates to shore up their liquidity position, may not face credit risk as they have this year. If they are, they will only save trouble for later.

Growth prospects for India next year are subdued. How tough it could be depends on how badly the global economy stutters. There will be long-term benefits in positioning India as an attractive second destination for producers trying to curb their exposure to China. But the wisdom of using $24 billion in public money over five years to accelerate a shift in global supply chains is bound to be called into question, especially if India 2024 falls into the same low-growth trajectory that Modi did in 2014 had driven national power .

More from Bloomberg Opinion:

• Xi Jinping’s biggest threat? China’s middle class: Minxin Pei

• Manufacture in India? It will require more than subsidies: Mihir Sharma

• China+1 is the theme of the Indian Christmas season: Andy Mukherjee

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Andy Mukherjee is a columnist for Bloomberg Opinion, covering Asian manufacturing and financial services. He previously worked for Reuters, the Straits Times and Bloomberg News.

For more stories like this, visit bloomberg.com/opinion

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