India Enters Recession
With GDP contracting by 7.5% in the July-September quarter, India enters first recession in over 25 years.
Hi there, I’m Aman Thakker. Welcome to Indialogue, a newsletter analyzing the biggest policy developments in India. The aim of this newsletter is to provide you with quality analysis every week on what’s going on in India.
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This Thanksgiving, A Heartfelt Thank You
Before we dive into this week’s issue, I want to take just a brief moment, having celebrated Thanksgiving here in the United States, to thank you for your support of this newsletter.
When I launched Indialogue on Substack a few months ago in March, I never expected that I would find such an engaged, kind, and supportive community of readers. I am so thankful that so many of you have replied week after week with your own reflections on the developments I cover in the newsletter, allowing me to learn from you and grow. I am so thankful that so many of you have supported and shared this newsletter on social media and with friends. I am so thankful that writing for you has been a weekly reminder of why I love researching, studying, and writing about India.
So, thank you for supporting and reading this newsletter, and I hope that I, and my writing, can continue to be of value to you. And now, back to the newsletter.
India Enters Recession After Second Consecutive Quarter of Negative Growth
Last week, the the Ministry of Statistics and Programme Implementation released “Estimates of Gross Domestic Product for the Second Quarter (July-September)” of Fiscal Year 2020-21. The data found that India’s GDP contracted by 7.5% during this quarter. This marked the second consecutive quarter that India has registered a contraction, meaning that India had fallen into a recession.
This technically marks India’s fifth recession since Independence in 1947. However, it is the first time that the technical definition - two consecutive quarters of contraction or “negative growth” - applies to India since India only began releasing quarterly estimates of GDP in FY 1997-1998. Prior to that, India only provided annual GDP data, and the last time it showed a contraction in annual GDP was in FY 1979-1980.
While this contraction was expected by many analysts, it continues to suggest how India’s economy, which was already weak before the COVID-19 pandemic hit, will continue to struggle with its recovery. For example, Kaushik Das, the Chief India Economist at Deutsche Bank, argued that:
While things may start to look better on a year-on-year basis, if we are lucky, the Indian economy will go back to its December 2019 levels of GDP by the end of 2021. Covid-19 has taken back the economy by about two years and growth will restart only from 2022.
Several factors impede India’s recovery. India’s economy already faced headwinds before the COVID-19 pandemic hit, with annual GDP growth falling from around 8% in FY 2016-2017 to around 5% in FY 2019-2020. India faced a prolonged crisis in its banking sector, and implementation issues with India’s Goods and Services Tax - a much needed and necessary reform - led to significant budgetary shortfalls. After COVID-19, a haphazardly announced lockdown with only four hours notice has, in retrospect, demonstrated that it did little to flatten the curve. Finally, India’s decision to focus its economic response to the pandemic on monetary (rather than fiscal) stimulus meant that economists remain largely bearish on India’s recovery.
The silver lining for India lies in the details of which sectors have seen growth. Manufacturing, in particular, rebounded from a contraction of 39.3% in the April-June quarter to a growth of 0.6% this quarter, while agriculture held steady at 3.4% growth (the same as last quarter). BloombergQuint has a helpful chart of the sector-by-sector breakdown:
While this news has led to a bit of cheerleading in some quarters, the Chief Economic Advisor to the Finance Minister Krishnamurthy Subramanian has struck a cautious tone, saying:
We should be cautiously optimistic… Uncertainty in the economic outlook is due to the COVID-19 pandemic and therefore I would urge caution especially given winter months... Till the pandemic does not go away, some of the sectors that are affected by social distancing will continue to experience a demand slump.
With uncertainty about how the next two quarters will go for India, what remains clear is that India’s path to recovery lies in its ability to handle the future spread of the COVID-19 virus.
For a Deeper Dive
I spoke about many of these issues (and others) with Uzair Younus, a good friend, a non-resident senior fellow at the Atlantic Council and host of the fantastic Pakistonomy podcast, which is currently looking at other countries in South Asia for its final episodes of the year. If you’d like to hear more about India’s economic outlook, its progress on much-needed reforms, and how its economic performance is tied to its foreign policy goals, please check out our nearly hour-long conversation here:
As always, please feel free to reach out to me with any thoughts, feedback, or comments about anything I said.
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A Brief Self-Promotional Interlude
Last week, there was a flurry of activity by Indian officials in India’s neighborhood. India’s Foreign Secretary Harsh Vardhan Shringla traveled to Nepal to meet with his counterpart and Nepalese leadership to discuss the ongoing boundary dispute over the Kalapani region between the two countries, which flared up this past summer. Meanwhile, India’s National Security Advisor Ajit Doval traveled to Sri Lanka to take part in the revived India-Sri Lanka-Maldives trilateral maritime security dialogue, which has not met since 2014. Finally, Minister of External Affairs Dr. S. Jaishankar was in Seychelles, the strategic island nation in the Indian Ocean, to meet with his counterpart.
What do these visits mean for India’s neighborhood policy? Is India’s renewed push driven by a desire to counter Chinese inroads in the region? Archana Chaudhury of Bloomberg invited to comment on these developments, and these questions, for her article titled “India Steps Up Efforts to Draw Neighbors Closer to Counter China”
You can read my comments below, or read the full article here:
India has found it hard to match Chinese investments in infrastructure and security in smaller South Asian nations over the last decade, but its own policies have also added to the frayed ties with its neighbors, according to Aman Thakker, adjunct fellow at the Center for Strategic and International Studies and Shapiro scholar at the University of Oxford.
“India’s approach to see these countries as its ‘strategic backyard’ meant it often took these countries for granted,” Thakker said in an email. “China’s role, while certainly not the only factor, is a significant factor in India’s renewed push within the neighborhood and in the Indian Ocean region.”
News Roundup
Prime Minister Modi will host the Prime Ministers of six of the member states of the Shanghai Cooperation Organization - Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan - for a virtual meeting on Monday, November 30. The Prime Minister of Pakistan, Imran Khan, will skip the meeting, with the Parliamentary Secretary for Foreign Affairs participating in his place.
After banning 59 Chinese apps in June 2020 and another 47 apps in July 2020, India’s Ministry of Electronics and Information Technology announced that an additional 43 Chinese apps would be banned for “engaging in activities which are prejudicial to sovereignty and integrity of India.” The new list of apps includes Alibaba’s e-commerce app, AliExpress.
The Indian Navy has reportedly leased two MQ-9B SeaGuardian UAVs for a period of one year, which were inducted under India’s emergency procurement procedures.
Prime Minister Modi chaired a high-level meeting with chief ministers of all States and UTs via videoconference on 24 November 2020. He reviewed the COVID-19 response and preparedness of six “high focus” states: Haryana, Delhi, Chhattisgarh, Kerala, Maharashtra, Rajasthan, Gujarat and West Bengal. He also discussed the modalities of COVID-19 vaccine delivery, distribution and administration with all chief ministers.
External Affairs Minister Dr. S. Jaishankar visited Seychelles from November 27 - 28, 2020, discussing issues such as combating drug trafficking, piracy, climate change, the future trajectory of the development partnership,defence cooperation, people-to-people ties, and trade, among other issues, with his counterpart, Mr. Sylvestre Radegonde, Minister of Foreign Affairs and Tourism of Seychelles.
The Indian Navy is reportedly considering two new trilateral naval exercises. The first one would see the Indian, Australian, and Indonesian navies come together, while the second would see France join the currently bilateral Australia-India AUSINDEX maritime exercises.
The Ministry of Ports, Shipping and Waterways issued a draft of the Merchant Shipping Bill, 2020 for public consultation. The new bill would repeal and replace the Merchant Shipping Act, 1958 and the Coasting Vessels Act, 1838, would reduce licensing requirements for Indian vessels, enable electronic registration, and widen the eligibility criteria for ownership of vessels. The full draft of the bill is available here, and is open to comments from the public until December 24, 2020.
Defense Minister Rajnath Singh met virtually with his counterpart from Vietnam, General Ngo Xuan Lich. The two sides signed an Implementing Arrangement for cooperation in the field of Hydrography between National Hydrographic Office, India and Vietnam Hydrographic Office, which will enable sharing of hydrographic data and assist in production of navigational charts by both sides.
Five to Read
From cogent analysis to potentially big news that you should keep an eye on, here are a few commentaries and other pieces of writing that I found particularly enlightening:
Dr. Raghuram Rajan, former Governor of the Reserve Bank of India (RBI), and Dr. Viral Acharya, former Deputy Governor of the RBI, argue: The Reserve Bank of India (RBI) recently released a report of an Internal Working Group (IWG) to review bank ownership guidelines. The Reserve Bank reviews its regulations periodically, and by and large this working group has done the usual thorough job. Yet its most important recommendation, couched amidst a number of largely technical regulatory rationalizations, is a bombshell: it proposes to allow Indian corporate houses in banking. While the proposal is tempered with many caveats, it raises an important question: Why now? Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking? We would argue no.”
Mercedes Ruehl, the Financial Times' Asia Tech reporter, writes: “Chinese venture capital investors are shifting their focus to Indonesia after India closed its doors to them, helping to create a 55 per cent surge in tech investment in south-east Asia’s biggest economy in the first half of 2020… Chinese VC and tech investors powered a tech boom in India, investing in many of the country’s leading start-ups, including payments company Paytm, meal delivery company Zomato and Byju’s, an education platform. But in April New Delhi unveiled sweeping rules targeting opportunistic Chinese takeovers, spooking investors and cutting off crucial funding for tech start-ups.”
Andy Mukherjee, a columnist at Bloomberg, argues: “Those of us who thought that muscular leadership would revive India’s dream of mimicking Chinese-style double-digit expansion are not just disappointed. For many of my generation, our long-cherished hope for a better, greater India is all but gone. We wanted to trade some of our democratic chaos for a little bit more growth. We ended up with less of both.”
Sana Hashmi, Taiwan Fellow at the Institute of International Relations at National Chengchi University and non-resident Fellow at Taiwan’s NextGen Foundation, writes: “India is an important part of the Indo-Pacific region, and it is natural for India to collaborate with like-minded countries to pursue common interests. On the one hand, China has emerged as a security concern for India, and, on the other, Taiwan is willing to partner with major stakeholders in the Indo-Pacific to ensure regional stability and peace… While a concerted policy is required for ensuring Taiwan’s inclusion in the Indo-Pacific, India should be more forthcoming towards Taiwan. China has clearly violated the Panchsheel Agreement by repeatedly raising the issue of India’s Jammu and Kashmir. It is interfering in India’s domestic politics, and dictating how India should handle its foreign relations. China cannot have a say in how India wishes to engage with other partners such as Taiwan.”
Lt. Gen. D.S. Hooda (retd.), former Northern Army Commander, writes: “The Indian military faces the twin challenges of an assertive China and stressed budgets. In view of this, there is little option but to look at capability enhancement through greater adoption of technology. However, there is still some hesitation in the military to move firmly in this direction. The military leadership has grown up with and is comfortable with the existing organisational structures and systems. There is an understandable reluctance to lessen the reliance on high-value monolithic platforms like tanks, battleships, and manned aircraft that have served us well in the past… In looking at the future, we need to have clarity on areas of technology focus and the approach to be followed. The adoption of advanced technology is uniformly low in the three services, and while this is worrying, it also provides us a second-mover advantage. We could learn from the successes and failures of others and move straight into areas of technology that offer revolutionary progress.”