MUMBAI -- Since the turn of the 20th century, the Godrej family has made bank safes. Now called Godrej Security Solutions, part of the sprawling Godrej business empire, the company is a bellwether for the state of the Indian economy. When banks are confident and expanding their branch networks out into the countryside, they need safes and other security equipment.

For the last three years, business has been slow. "For every 100 bank safes we used to sell, we are selling 20 now," said Jamshyd Godrej, the company's chair and managing director.

India's banking sector, and public banks in particular, are groaning under the weight of nonperforming loans. NPL ratios have more than doubled over the past five years, and the debt issues have infected the immense shadow-lending industry, causing a huge shortage of credit. A central bank-backed plan to expand financial services to rural consumers -- which should have been a boon to Godrej Security Solutions -- has stalled, while the removal by the government of many bank notes from circulation has further dampened demand.

In early March, the Reserve Bank of India took control of Yes Bank, the country's fourth-largest lender, capping withdrawals at 50,000 rupees ($677), after the company failed to raise enough capital to reassure the central bank that it could cover its mounting pile of bad debts.

"We don't know if demand for bank safes will ever come back," Godrej said. "Today, our strategy is to upgrade the security systems in remote areas where armed gangs break into the banks."

The problems in the banking sector are symptomatic of a wider malaise in the Indian economy. Growth is at its slowest in years, and consumption is weak. The country is gripped by social unrest; in February, the government's persistent attempts to disenfranchise and marginalize its Muslim citizens boiled over into violence, killing at least 50 people in Delhi alone.

The political and economic crises are tightly interwoven. When Narendra Modi became prime minister at the head of the Bharatiya Janata Party in 2014, he promised to do for India what he did for his home state of Gujarat, where he had presided over an economic growth spurt. He would revive manufacturing, modernize the financial sector and end the crony capitalism associated with the Congress Party, which had ruled India for most of the post-independence period.

That boom failed to materialize during his first term, which was marred by a botched rollout of a sales tax and the cancellation of most bank notes -- which, in cash-centric India, hit particularly hard. Regardless, he was reelected with a huge majority in 2019.

A new citizenship law, denying recognition to Muslim immigrants from neighboring countries, has triggered violent protests over the early months of 2020. © Reuters

What Modi did carry over from his time in Gujarat, though, was intercommunity violence. In 2002, while Modi ran the state, at least 1,000 people died in clashes between Hindus and Muslims.

Moreover, instead of using its mandate to tackle the mounting economic challenges, Modi's government has doubled down on Hindutva, its populist, Hindu nationalist agenda. Backed by the Rashtriya Swayamsevak Sangh, a Hindu ultranationalist group seen as an ideological driving force behind Hindutva, it has revoked Jammu and Kashmir's autonomous status, changed the country's citizenship laws to deny recognition to Muslim immigrants from neighboring countries, and tried to enforce Hinduism as central to India's values and identity. Almost all of the government's political capital has been thrown into this massive social project. Economic reform has fallen by the wayside.

"Prime Minister Modi won the election," said an executive at a Mumbai venture capital fund. "But he lost the economy."

Boom to bust

The signs of India's economic decay are visible in the commercial hub of Mumbai. Cranes atop the skeletons of residential towers have been stationary for months, as developers struggle to win credit in the face of lackluster demand.

In the countryside are similar signs of suspended activity. Demand for big-ticket purchases such as tractors has softened, while sales of even the cheapest everyday items have been weak. When Gautam Sharma, head of Nissin Foods' Indian operations, visits local shops in rural India to gauge demand for everything from his own instant noodles to individual sachets of shampoo, he says he is stunned by the lack of appetite.

"People consume when they have faith in the future, but the government has destroyed that faith," Sharma said. "People aren't consuming because they fear the future. There is an atmosphere of mistrust."

From automobiles to residential property, Indian consumers are holding back on purchases as they wait out the slump. Car sales hit their lowest-ever level in the third quarter of 2019. Tata Motors, one of the country's largest automakers, reported a 30% decline in sales between April and December. Vehicle production fell more than 13% in 2019. It is likely to slump further in 2020, since many components are imported from China.

Confidence has all but disappeared. Private investment as a share of gross domestic product has slipped to its lowest level in years, while weakness in manufacturing and construction has been the heaviest drag on growth, according to data from consultancy TS Lombard. A bump in investment in the third quarter of the fiscal year was down to two transactions: Reliance Industries' expansion of its Jamnagar oil refinery, and airline IndiGo's order for 300 new planes.

Nor has anything been helped by the Modi government's string of economic policy debacles. In November 2016, the BJP government abruptly canceled almost 90% of the cash in circulation -- a move described as both an effort to eliminate "black money" and corruption, and a boon for ordinary Indians. "This step will strengthen the hands of the common man in the fight against corruption, black money and fake currency," Modi vowed at the time.

But in an economy as cash-reliant as India's, pulling money from the system saw transactions slow dramatically. Daily wages at small businesses -- barbers, weavers and small-scale farmers -- all dropped, on average, from 400 rupees a day to a mere 150. And a side effect of this drastic measure saw opposition parties deprived of funds to fight state elections in Uttar Pradesh, the most populous area in the country.

Muslim demonstrators in Bangladesh protest against a scheduled visit by Modi in March. © Reuters

Demonetization was followed in June 2017 by the botched execution of the goods and services tax. A praiseworthy concept, it was marred by an overly complicated, constantly shifting formula for calculating the taxes incurred, and imposed heavy costs on smaller enterprises that could ill afford the expense.

The final blow came in the fall of 2018, with the implosion of Infrastructure Leasing & Financial Services, a triple-A rated nonbank lender, which gutted the credit market. IL&FS and other nonbanks had become important sources of credit after traditional banks, struggling under the weight of bad debts, stopped lending to companies and households. Instead, they loaned to nonbanks, who on-lent the money at a higher rate. Over the past five years, the ratio of banks' soured loans has jumped from around 4% to more than 9%.

The outlook is bleak enough that several credit rating agencies have downgraded India to a precarious status one step above junk. A further downgrade would put yet more pressure on an ailing economy, weaken the rupee, raise the cost of capital and trigger even greater systemic stress.

"The pressure is building up. Fiscal problems will escalate, and the deficit could easily total 10% of GDP," one prominent economist said. "And while the level of foreign exchange reserves is now approaching $470 billion, that amount can rapidly disappear."

Massive public stimulus has been planned, including $15 billion of public spending on the agriculture and construction, but analysts have found the policy response underwhelming. (Photo by Kosaku Mimura)

Despite massive stimulus measures -- including a steep cut in the corporate tax rate from 30% to 22%, and $15 billion in new spending on agriculture and infrastructure -- analysts have found the response underwhelming.

"The quality of government spending seems to have deteriorated," said UBS economists in a recent note, remarking that recent January budget plans "lacked the growth/sentiment-boosting measures that the markets were looking for." Underinvestment in infrastructure, they added, has held back longer-term attempts to build up the manufacturing sector -- the so-called Make in India campaign, which was a pillar of Modi's economic strategy.

A common refrain among businesses is that Make in India is emblematic of the opportunities missed under the BJP. While the party's pledges to turn India into a $5 trillion economy and a manufacturing powerhouse to match China were always somewhat far-fetched, the past few years could have been a chance for the country to muscle its way into global supply chains. The trade friction between the U.S. and China has forced many companies to reposition, which could have jolted Make In India to life.

For many, the unfulfilled vision of Make in India is emblematic of the opportunities missed under the Modi government. © Reuters

There have been some limited successes, with cases of international companies replacing imported components with locally made ones, or expanding their assembly operations to serve the local market. Apple assembles some lower-end iPhones in India and began assembling newer iPhone XRs in Chennai in October 2019. A joint venture between Hitachi and Johnson Controls, which assembles air conditioners in Gujarat, is reducing the number of compressors it brings in from China. Samsung assembles some handsets in Noida, outside Delhi.

"It was just a war cry at first," said Neelkanth Mishra, an analyst for Credit Suisse in Mumbai. "But it is too early to say it is a complete flop. It needs to happen over a fair bit of time. We are today where China was in the early '90s."

However, even Make in India has become caught up in nationalist populism. Encouraged by the more conservative elements in the party, Modi's government has raised tariffs on many imports from China. Since 2018, duties have doubled on Chinese goods like footwear, toys, beauty products, electronics and furniture. Last year, Modi pulled India out of the Regional Comprehensive Economic Partnership, an attempt to create a pan-Asian trading bloc that would have spanned half the world's population. India's main concern was reportedly that the country's manufacturing sector would be uncompetitive, and the agreement would flood the market with imports.

"Make in India was originally about making the country an export hub," said Priyanka Kishore, head of India and Southeast Asia at Oxford Economics. "But recently the government has used it as an excuse for protectionism. The import tariffs that this government has imposed go against the spirit of what Make in India was supposed to be. It is a lost cause."

"Make in India was originally about making the country an export hub, but recently the government has used it as an excuse for protectionism. ... It is a lost cause," said Priyanka Kishore, head of India and Southeast Asia at Oxford Economics. © Reuters

Breaking point

In the immediate term, the government urgently needs to find ways to turn around the pessimism that has infected almost all parts of the Indian economy. But confidence, once lost, is hard to recover.

"Today, the biggest problem in India is the lack of confidence domestically," Kishore added. "The question in my mind is, when does the patience run out?"

There are signs that even in India's famously pragmatic business community patience is wearing thin. Many bought into the BJP's promises to clean up politics but are now losing faith.

"Modi's promise of minimal government and maximum governance hasn't happened," said the founder of one major hospitality business in Delhi.

"This government thinks a cocktail of religion and politics will help them stay in office," said the head of a local financial company in Mumbai. "They don't care about [the economy] or minorities or integrity."

In private, disenchantment with the government's prioritization of ideology and social engineering has become widespread. But few people are willing to speak up, due to a justifiable fear of becoming sidelined.

In India, where the nexus between politicians, bureaucrats and businesspeople is powerful, being in favor matters. In 2014, investors arbitraged the political divide by selling DLF -- a property developer with links to the Congress Party -- and buying Adani, founded by Modi ally Gautam Adani. Modi regularly borrowed Adani's private plane to fly to election rallies before becoming prime minister.

During Modi's first term, Deepak Parekh, chairman of HDFC group and widely considered the country's most respected banker, publicly reminded the prime minister that he was elected to implement economic reforms, rather than his Hindutva agenda. Parekh has been frozen out of business trips and meetings with the prime minister ever since.

At a newspaper awards ceremony in Mumbai in mid-December, Rahul Bajaj, then chairman of Bajaj Auto, stood up and delivered a nearly five-minute lecture to Amit Shah, the home minister and Modi's closest associate, and two other cabinet ministers, referring to the lack of openness on the part of the government to criticism. Minister of Finance Nirmala Sitharaman promptly described his observations as "anti-nationalist."

As the Hindustan Times subsequently wrote: "Government ministers and government-aligned public voices were quick to attack Bajaj -- thereby validating Bajaj's concerns."

Under Modi, the BJP has aggressively targeted media outlets, many of which are owned by large conglomerates that rely on the government for business. A number of high-profile critics have lost their jobs at newspapers, and journalists who do not toe the line find their access to government officials cut off.

The government has also been highly selective in its handing out of TV licenses. Republic TV, part-owned by a BJP lawmaker, Rajeev Chandrasekhar, sailed through the licensing process to launch in 2017. Media entrepreneur Raghav Bahl, a prominent critic of Modi, has been waiting three years to launch a channel in partnership with Bloomberg.

The general despondency over the situation seems largely confined to domestic investors, at least for now. "Foreigners see the government's social agenda as an internal matter," said Oxford Economics' Kishore. "The big negative wave of sentiment is in India, not outside India. ... It is puzzling that there is so much patience with a government which was originally elected with an economic mandate. I ask why, and they say, 'India is still growing. We can ignore certain factors.'"

Similarly, Ridham Desai, head of research at Morgan Stanley India, said that he has not had a single call from foreign investors since December, when the introduction of Modi's citizenship act triggered protests.

Where foreign-backed projects have stalled, it has usually been down to local political issues. Korean carmaker Kia Motors had a dispute with the state government of Andhra Pradesh, after the authorities changed various incentives on hiring and power supply. Kia disputes accounts of a disagreement with the government. A spokesperson told Nikkei: "Kia Motors India [does] not have any issues with the Andhra Government".

In Maharashtra, a 1.1 trillion rupee ($14.9 billion) segment of a Japanese government-backed high-speed railway linking Mumbai and Ahmedabad in Gujarat is in doubt, after the state government declared it would review the project.

Some international investors, however, are also becoming nervous about India's tilt toward bigotry and authoritarianism. One investor, currently mulling a bid for Yes Bank, told the Nikkei Asian Review: "The [Rashtriya Swayamsevak Sangh] policies the government is adopting are disconcerting."

One Singapore-based Indian tech investor said he was positive towards India over the long term, but had "concerns" for the near future. "You can only ignore the [macroeconomic] and social [factors] so long."

Backlash

No government can afford to ignore the economy entirely, however, and there are signs that a backlash against the BJP is building.

During the campaign leading up to Delhi's elections on Feb. 8, it was hard to believe that the two top contenders were taking part in the same contest. During the campaign, the BJP leaned into its anti-Muslim rhetoric, branding women who led protests against its citizenship law as "terrorists" and calling the Muslim-majority suburb of Shaheen Bagh a "breeding ground for suicide bombers." The incumbent Aam Aadmi party, led by Arvind Kejriwal, emphasized its record of improving basic services, particularly education. Aam won with an overwhelming majority.

"The divisive election campaign illustrates how identity politics can overwhelm the service delivery message," said Amitabh Dubey, political analyst for research company TS Lombard in Delhi.

There are some signs of backlash: In Delhi, pictured here, as well as Maharashtra and Jharkhand, Modi's party has failed to win local elections. © AP

After Modi's BJP won its massive mandate last year, some pundits said India had all but become a one-party state. But the BJP has since lost local elections in Maharashtra, where Mumbai is located, and the smaller state of Jharkhand, as well as Delhi. The new citizenship bill has provoked huge protests across the country that are only intensifying.

The rising dissent could further dampen confidence and give policymakers yet another political problem to distract them from tackling the economy, analysts warned.

"This development threatens to divert political attention away from the much-needed policy focus on the economic revival," TS Lombard analyst Shumita Sharma Deveshwar said.

That lack of focus may be at play in the delayed bailout of Yes Bank, whose problems festered until they became impossible to ignore. The RBI has also imposed a monthlong moratorium on withdrawals from the lender, doing so a day after one senior banker warned the central bank that there was likely to be a run on Yes, according to sources with knowledge of the situation.

"RBI and the government should have acted months ago," said Sanjay Bhandarker, who until recently headed the restructuring practice for Rothschild in Mumbai. "But they lack the competence. At some point, there will be a huge impact on the economy because of their lack of expertise."

"India could soon have the worst aspects of authoritarianism, without any of the economic efficiencies" A Mumbai-based lawyer

The government could spend more money on infrastructure or upgrading services, particularly education and housing. Rather than do that, analysts and businesspeople fear the BJP will double down on its Hindutva agenda.

"Hindutva is a diversion from the economic woes and the lack of a real agenda to tackle them," said the local Indian head of one major international investment fund in Mumbai.

That could lead to more division, more unrest and quite probably a more aggressive crackdown. As one Mumbai-based lawyer said: "India could soon have the worst aspects of authoritarianism, without any of the economic efficiencies."