Amid a near euphoric mood for global emerging markets at the annual IMF-World Bank meetings with the benchmark MSCI stock index up almost 30% as average GDP growth was upgraded to over 4.5%, India stood out as a major disappointment with lagging 20%-plus share gains through September as first-quarter expansion came in at below-target 5.7% on meager private investment. Finance Minister Arun Jaitley attributed the slowdown to short-term disruption from consecutive demonetization and tax overhaul moves, and dismissed criticism about unmet structural reforms on land acquisition and labor practice credit restraint as banks grapple with double-digit bad loan ratios, and fiscal slippage as the 3% of GDP pledge is overshot. He supported the reconstitution of an Economic Council of outside advisers Prime Minister Narendra Modi disbanded early in his term while lambasting a predecessor’s prediction of an imminent “hard landing” back to the 4-5% range. In Washington, he tried to divert attention to the Belt and Road-competing Project Mausam, designed to spur infrastructure connections among Indian Ocean states, but his skeptical audience remained impatient for policy lapse admissions and more sweeping bank restructuring and agriculture and industry deregulation.

By sector, demonetization’s toll was heaviest on financial services and real estate after the confiscation of high-denomination bank notes

Last year April-June GDP growth was 9%, and the 5.7% figure this period was mainly due to official spending as the non-government 90% portion of the economy only increased 4.3%, the worst since Modi took office three years ago. By sector, demonetization’s toll was heaviest on financial services and real estate after the confiscation of high-denomination bank notes, and manufacturing suffered most from the unified national tax rollout this summer, as smaller firms, in particular, struggled with competitiveness and compliance. Imports also surged ahead of implementation to widen the trade deficit, with the current account gap now forecast in the 1.5-2% of GDP range. The IMF took half a percent off the 2017-18 growth forecast in its latest World Economic Outlook to barely pip China at 6.7%, although it foresees near 7.5% next year. Central bank governor Urjit Patel added his voice to the chorus by holding interest rates despite food-driven inflation creep toward 4%, as tax reform “rendered immediate prospects uncertain.” Fitch Ratings also cut its growth forecast below 7% after a first-half drop in rural household consumption. Hindu nationalism, a staple of the government’s platform, may have contributed to reduced output with the imposition of beef and beer bans during that time.

Fiscal consolidation, enshrined in legislation which caps public debt at 60% of GDP, may already be off track, after a proposed $8 billion spending package which would widen the deficit to 4% on top of farm loan write-offs not originally programmed. The IMF, in its latest Article IV consultation, recommended an independent council for “accountability and transparency.” India Ratings, owned by Fitch, decried the pump-priming plans, with private capacity utilization at just 70% leaving ample room to ramp up investment. The intervention will not boost poor fixed capital formation below 30% of GDP, and cycle recovery will be delayed until end-decade unless stressed energy and infrastructure companies get debt workouts, the firm argued. The perennial interference tendency, which Prime Minister Modi’s team vowed to banish, extends again to exchange rates, with a US Treasury Department Report pointing to warning threshold activity to curb rupee appreciation as reserves reach $400 billion.

Foreign portfolio inflows into stocks dipped $3 billion for the quarter ending September, but stayed buoyant into bonds with $1.5 billion entering so far in October, as a popular “carry trade” borrows at industrial world 1% costs to invest in domestic 7% yields. In the same period, gross non-performing assets at private lenders also jumped 50%, as state-owned units with two-thirds of the system total are in dire shape, with balance sheet cleanup and Basel III standard adherence put at $50 billion, five times the government’s planned recapitalization. Bank shares are at a 9-month low with credit growth in a multi-decade slump at 5%, as Finance Minister Jaitley and colleagues counsel patience for a new insolvency regime to resolve almost $200 billion in problem loans, according to India Ratings calculations. Modi recently lashed out at the business and financial communities for their “pessimism,” but the hard numbers will not sail away on Mausam-like winds.