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India’s Modi Slowdown

After Prime Minister Narendra Modi was overwhelmingly re-elected in May with an even larger majority for his party, many economists expected him to take bold steps to remove the many bottlenecks that have discouraged investors. But no one should believe the Modi government has the ability or the will to fix what it broke.

NEW DELHI – Until recently, Indians had gotten used to taking economic growth for granted. After a decade of annual growth averaging over 9%, India’s economy weathered the post-2008 worldwide recession and grew at a still impressive rate of 7% until 2014-15. Nothing, it seemed, could stop the gravy train from rolling on.

And then came Prime Minister Narendra Modi’s government and his biggest economic blunder, demonetization, which took 86% of India’s currency abruptly out of circulation (in an effort, Modi claimed, to flush out undeclared wealth). The economy is yet to recover. Millions of jobs were lost and hundreds of thousands of small and micro enterprises – employing 2-7 workers and dependent on daily cash flow to sustain themselves – went under. All that was achieved was that Modi, who prizes appearances above actual results, managed to look bold and decisive.

If demonetization was a bad idea badly implemented, next came a good idea badly implemented: a nationwide Goods and Services Tax (GST). Instead of a simple, flat and all-inclusive GST – as applied in every country where the concept has worked well – the government unveiled a multi-tier GST. Despite having five different rates and a luxury tax on top, the government’s hasty and botched rollout retained a number of key exclusions (including alcohol and petrol) and continues to confuse all who are subject to it. These two initiatives derailed economic growth, which is now expected to slow to 5% this fiscal year.

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