How does the economy work in India

India's economy in recession

It is a first for Asia's third-largest economy: After two negative quarters, India is now officially in a recession - the first time since such economic data was collected in 1996.

According to the state statistics agency, the Indian economy contracted by 7.5 percent in the three months from July to September compared to the same period last year. Economists had expected a minus of more than eight percent after the tough lockdown to contain the corona pandemic. And compared to the fall in gross domestic product of minus 24 percent in the previous quarter, the current data is almost a cause for celebration.

In the past few weeks, there had already been farewell to the hopefuls among Asia's emerging countries, and there was talk of turning away from foreign investors. "Global corporations no longer rely on India," was the headline Handelsblatt a few days ago and reported on the sometimes dramatic effects of the economic slump in India, also for German and other foreign companies. In fact, the US motorcycle manufacturer Harley-Davidson wants to close its Indian factory and the Japanese car company Toyota has put its expansion plans in India on hold, reports the Düsseldorf daily.

Strong slump - also for foreign companies

The result of a current study by the consulting firm Wamser + Batra, which specializes in India, seems devastating at first glance: Almost every second company surveyed rated its current business situation in India as poor. Six out of ten companies suffered a sharp drop in sales, while only 18 percent reported good business. However, 40 percent of the Indian branches of the companies surveyed are still on a growth path, and one in three even wants to expand its production capacities.

Deserted streets during Mumbai's lockdown in late March

Study author Wolfgang Bergthaler admits that foreign companies are severely affected by the consequences of the pandemic in India. "According to our current study Business Climate Index India 52 percent of the companies assume that sales will be cheaper again in 2021 and expect increasing sales figures in India, "emphasizes Bergthaler in an interview with DW. The companies that have been hit particularly hard at the moment were also rather optimistic about the future. For their current study, the India specialists asked more than 100 decision-makers from German, Austrian and Swiss companies about their business in India.

The majority of German companies that are active in India come from the mechanical engineering sector, explains Bergthaler. The industry is still doing comparatively well compared to the companies in the end customer business or in the service sector, he says, while the automotive suppliers in India had to "bleed" quite a bit.

Too early for a swan song on India

But the worst seems to be over and there is now a slight sense of optimism in India. "While the agricultural sector, aided by a good monsoon season and government subsidies, is a bright spot, we believe the recovery is likely to continue spreading across the economy and is about to solidify," writes Rahul Bajoria, India- Chief Economist at Mumbai-based Barclays Bank, UK, in a recent report.

The supplier industry in particular was hit hard: Bosch production in Bangalore

This coincides with a noticeable decrease in daily infections. Now only half as many new infections are counted as in mid-September. At that time, according to official data, there were more than 97,000 new infections per day.

"In view of the increasing number of cases in other countries, India is no longer the country in the world most severely affected by corona in terms of new infections and deaths," states Bajoria. Barclays is now forecasting a decline of 6.4 percent for the full year - which is significantly less than the 9.5 percent decline that India's central bank, the Reserve Bank of India (RBI), has been anticipating so far.

Crisis as normal

Wolfgang Bergthaler is also convinced that India should not be written off so quickly: "India has an extremely high degree of resilience. The crisis is more or less normal there. The country and its economy have had to master many tests in the last few decades - it is in it one practiced in India. "

Study author Wolfgang Bergthaler: "Corona has made decades of developments more visible"

The author of the study points out that the "big picture" has not changed in the long term: India has a young, consumer-hungry society. The expansion and renewal of industry and infrastructure would continue to create new jobs. With its "Make in India" strategy, the Indian government has made a clear commitment to this. In addition, it is politically desirable to make India more independent of foreign imports with the "Self-reliant India" strategy. "Conversely, that means for German industry that it also has to produce in India in order to secure a larger part of the market," said Bergthaler.

Peasant protests against agricultural reform

Many farmers who fear that the Modi government's new agricultural laws will lead to a drop in the price of their produce have taken to the streets. Tens of thousands of farmers, fearing for their livelihoods, have now set out for a protest march in the capital New Delhi.

They see themselves as victims of the liberalization of the agricultural markets promoted by Modi, which enables farmers to market their products directly instead of selling them at minimum prices guaranteed by the state. This gives agricultural wholesalers too much power and, above all, benefits large farmers - at the expense of many millions of small farmers.

Corona has uncovered many grievances in Germany, for example in the meat processing industry. The pandemic has also made many imbalances visible in the Indian economy. Millions of migrant workers from rural areas lost their jobs almost overnight. The army of factory workers, domestic helpers and other people who form the backbone of the economy suddenly became visible in India too, explains the India expert.

Modernization boost due to the pandemic?

"We are talking about tens of millions of people who do simple jobs in the cities, some as day laborers, in factories or in construction. Many are still in the villages and leave visible gaps in the economy and society," says Bergthaler. Companies are now looking for workers in vain, which has sparked calls for more automation in India. That is a dilemma, but also not a new phenomenon. Covid-19 is only an accelerating force here: Even before the pandemic, far fewer people were working on the construction sites in Delhi, Mumbai or Bangalore than ten years ago. "If you will - and without being cynical - German, American or Korean machines are replacing ordinary workers who are losing their poorly paid and sometimes inhumane jobs."

Not only Bergthaler assumes that fewer and fewer machines from China will be used. Because India wants to push back the influence of China in its own economy, the government is determined to cut back imports from the Middle Kingdom as well. "Equity investments by Chinese investors are largely undesirable and practically impossible."

Boycott calls for Chinese products in Mumbai in late June

Anti-China course continues

The fact that India is not participating in the new free trade area with China and the ASEAN states is primarily due to the strong anti-China sentiment in the country. "A free trade agreement under the leadership of China naturally makes no political sense. Under Trump, Prime Minister Modi sought proximity to the United States. We will see whether Joe Biden will also reciprocate this 'love'," said Bergthaler.

Observers largely agree that India, with its 1.4 billion inhabitants, simply cannot afford another shutdown of its economy. Prime Minister Modi now seems to be steering his country through the crisis according to the motto "Close your eyes and through". Critics accuse him that the falling infection numbers are due to significantly fewer corona tests.

In any case, the India experts at Wamser + Batra anticipate many catch-up effects and a return to economic growth in 2021. "While Europe is in lockdown again and the USA is still ahead of winter, the health crisis in India has been 'declared over' and the focus is on business again," says Bergthaler Modi's course. And so he assumes that India - from a purely economic point of view - has the worst behind it.