This piece is part of’s Hard Times series, which seeks to simplify the Great Indian Slowdown for readers. You can find the rest of the pieces from the series here.

It is clear to everyone now that India is going through a severe slowdown, with Gross Domestic Product growth this year likely to be a woeful 5% – far below the expected 7.4%. But it is only beginning to become clear to those who don’t pay close attention to the economy that India will not only be affected in 2019-’20 alone. Growth is likely to be sluggish for some time.

“The strong absorbent capacity of the Indian economy shows the strength of basic fundamentals of the Indian economy and its capacity to bounce back,” Prime Minister Narendra Modi is reported to have said at a meeting of businesspeople, economists and policy experts this week.

But what this “bounce” will look like is uncertain.

No V-shaped recovery

A term you will hear occasionally from those who pay attention to economics is “V-shaped recovery”. This is the idea that the line graph of any particular indicator, like say a country’s Gross Domestic Product, may have nose-dived, but it will spike back up as well.

An example might be India’s GDP growth figures right after the 2008 economic crash.

The “V” is easy to spot here. Growth dropped precipitously in 2008. But it rebounded to nearly the same levels as before the following year. This suggests that the cause of the drop was a sudden factor – in this case the global economic crash – and that the government did enough to bring the economy back on track.

The phrase was also popular in India a few years ago when Modi decided to suddenly withdraw 86% of the country’s currency and replace it with new notes, a move that delivered a massive shock to the economy with no noticeable gain.

They may have been right too.

There is indeed a “V” lurking in the Gross Domestic Product growth numbers after demonetisation – albeit using a GDP calculation that has been criticised by a wide variety of economists and questioned by Prime Minister Narendra Modi’s former Chief Economic Adviser.

But that only makes what happened afterwards even more worrisome.

Bigger slide

Here is the Reserve Bank of India’s quarterly projection of GDP growth, provided in the Monetary Police Committee’s report of December. The line represents the actual growth, whereas the shades are projected outcomes.

The “V” is there, bottoming out in the first quarter of Financial Year 2017-’18, which corresponds to April-June of 2017, presumably when the initial effects of demonetisation – which was announced on November 8, 2016 – had fully made themselves felt.

But beginning the first quarter of the next Financial Year, that is April-June 2018, the numbers have registered a continuous, steady decline, falling to 4.5% in the second quarter of Financial Year 2019-20, i.e. July-September 2019.

Both the Reserve Bank of India and the government now expect GDP growth for the year to be at 5%. The State Bank of India, the country’s largest bank, expects the final growth number to clock in at 4.6%.

That wouldn’t just be deeply disturbing for a country that at the start of Narendra Modi’s first term in 2014 had double-digit growth in its sights. It also reflects something worrisome about the understanding that the government and other institutions have of the economy.

The RBI began 2019 with a projection of 7.4% GDP growth for India, and it now expects that number to be just 5%. That is a huge gap, one large enough to fit the entire economy of Uzbekistan or Chhattisgarh.

The SBI report, in fact offers even more bad news.

“We now believe that the RBI projection of a 5.9-6.3 per cent GDP for FY21 could be on the higher side,” the report said. “We could be now staring at a sub-6-per-cent growth for two successive years.”

Demonetisation bump

Indeed, there are two things to note here.

First, go back to the RBI graph. Although the “V” shape there is attributed to demonetisation, if you look closely, you’ll see that the decline begins before 86% of the currency was withdrawn, in the third quarter of Financial Year 2016-17.

A slightly earlier RBI graph makes this more evident. Here, the slide has begun in the first quarter of Financial Year 2016-17, i.e. April-June of 2016.

Look at it this way and a different conclusion may turn up. There is a growing consensus that we didn’t fully understand what was happening in the economy during demonetisation, because the older assumptions about links between formal and informal had broken.

Many understood that the informal sector was in pain, and it was not showing up in India’s statistics, which are heavily based on the assumption that the formal and the informal sector move in tandem.

But another theory suggests that for a while, the formal sector actually saw massive gains to the detriment of the informal sector. People were forced to financialise their cash, which moved into the Non-Banking Financial Companies that were suddenly able to lend, leading to some growth. As people still attempted to consume at the same level as before, for a while the bottom-line of big companies was actually expanding – which would have showed up on GDP indicators as growth (even if the informal economy was going into recession).

Future Hard Times pieces will take a closer look at this theory.

Eventually the bottom fellow out and consumption plummeted, leading us to the situation where we are now, with the lowest growth in years. Arvind Subramanian, the prime minister’s former chief economic adviser, makes this point in a recent paper taking on those who argue that the current slowdown is “cyclical”:

“There is an even bigger problem with the cyclicalists: they focus exclusively on the latest developments,” he wrote. “As a result, they miss the broader picture, namely that key components of demand have been weakening for nearly a decade. What we are now witnessing is merely the exhaustion of the final engine of growth, namely consumption, with the others having been anemic for nearly a decade.”

No silver bullet

The second thing to realise is, there is no silver bullet.

Surveys of economists ahead of the Budget, slated for the end of this month, are mostly divided between fiscal stimulus and fiscal consolidation – reflecting an uncertainty about what can possibly reverse the slide India is currently on.

As Shoaib Daniyal has pointed out repeatedly in the past, the government of India is broke. The other engines of growth – investment, consumption and exports – are all sputtering. Unless something radical happens, there is no quick fix to this problem.

Former Chief Economist Ashok V Desai made the point in a piece in August: “That leaves only a lucky accident to stimulate the economy — like Malayalis going to West Asia booming when the Arabs quadrupled oil prices in the 1970s, or techies going to the US in the 1980s to write information technology (IT) programmes. Such a lucky accident may happen at any time. But it is fundamentally unpredictable.”

In other words, even as members of Modi’s government are still insisting that nothing is wrong with the economy because people are still having weddings, the rest of us have to prepare for a what is likely to be a few years of anemic growth before India can start to dream of double-digit numbers and superpower status.

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