Is it a wobble or a stall? India’s growth has fallen to a dismal 5.7 per cent this quarter, the slowest annual rate since 2014 for an economy that was humming at around 7 per cent last year. The government says the slowdown is a hiccup, but the problem runs deeper.

Big bold ideas are partly to blame. Two key reforms — demonetisation and a new national sales tax — were introduced with the daring aims of rooting out black money and creating a national single market. But implementation was poor and created headwinds for the economy.

Prime minister Narendra Modi bears direct responsibility for the failure of the rash experiment in demonetisation. He took the decision to withdraw banknotes representing 86 per cent of cash in circulation — in an economy that runs on cash — consulting the central bank and telling his cabinet just hours before the announcement. It has achieved little. Consumption suffered and, with 99 per cent of the banned notes now in the formal banking system, anyone in possession of black money appears to have laundered it.

The new sales tax, on the other hand, was essential and long overdue. Due to a labyrinth of local and state levies, taxes account for a quarter of the final consumer price of Indian-made goods. Simplification could have spurred consumption and helped formalise businesses in the country’s large informal sector. But high hopes have given way to frustration at the complexity of the new code and its botched rollout.

However, these failures simply put the brakes on an already troubled economy. Exports have stagnated for years and while Mr Modi has made manufacturing a rhetorical priority, the reality of a world flush in manufacturing supply means his “Make in India” mantra is hard to achieve.

It will be even harder to achieve so long as business investment is constrained by the poor state of the banking system. Bad and restructured loans account for some 12 per cent of all bank assets. A fifth of large companies did not earn enough to pay interest on their loans. As a result, new loans and investment have slowed to a trickle.

This problem could be solved, by creating a “bad bank” to buy non-performing loans and restructure them. But there has been no progress as the government does not want to be seen showing leniency to corporate debtors. This is politically toxic but essential if banks are to resume lending.

Lower interest rates would also be appropriate. India’s inflation has fallen below 2 per cent in recent months yet the country’s interest rates have been higher than global averages. This has pushed up the value of the rupee and stunted exports. Lower borrowing costs would boost manufacturing and renew demand for domestic loans.

Finally, the government needs to listen to its own economists. Mr Modi is by his own admission an economic novice. But he has disbanded his Economic Advisory Council and launched demonetisation on his own whimsical initiative. His predecessor, Manmohan Singh, was an economist and yet relied on the group for advice. There is a lesson there for Mr Modi.

Recharging the economy is urgent because India sits on a demographic time bomb: 12m young Indians join the labour force every year and a stagnant economy may cause social unrest. Mr Modi’s extraordinary centralisation of power, which has allowed him to force through some ill-thought through reforms while ignoring the urgency of others, may serve his purposes politically. But he will need to adopt a different approach if he is to deliver on his promises of jobs, development and economic renewal.

Letter in response to this editorial:

A democratic country can’t rush its reforms / From Ashok Kumar Mohapatra, Patia, Bhubaneswar, India

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