By Bill Spindle 

NEW DELHI -- Since a landslide victory last year, Indian Prime Minister Narendra Modi has pushed through a series of controversial social initiatives that have drawn cheers from supporters but been criticized as part of a divisive Hindu nationalist agenda.

Now, the country's suddenly flagging economy, which not long ago was the engine driving India's emergence on the global stage, could become an even bigger challenge.

The government has estimated the growth rate for the current fiscal year ending March 31 at 5%, India's lowest since 2009 and down from a peak of 8.2% in 2017. The unexpected slowdown in what until The unexpected slowdown in what until recently was the world's fastest-growing large economy threatens not only to undermine India's nascent emergence as a global power but to amplify divisions at home as it becomes even harder to create the nearly million jobs a month needed to keep pace with the youth pouring into the job market.

The country's changing fortunes have dented Mr. Modi's reputation as an economic reformer since his arrival on the national political scene in 2014. While Mr. Modi grew up within the Hindu nationalist movement that spawned the Bharatiya Janata Party, what set him apart as a politician was a reputation for sound economic management and a global perspective during his years as head of one of India's most dynamic states.

Economic changes, effective governance, development initiatives and globalization remained at the top of his administration's national agenda throughout that first term, enhanced by the prominent roles played by several reform-minded, U.S.-trained economists that Mr. Modi brought on board.

Progress was incremental and sometimes flawed, such as Mr. Modi's overnight elimination of nine-tenths of the value of currency notes in circulation, but an overhaul of the national tax system was generally applauded at home and abroad along with the introduction of a corporate bankruptcy code. Steps were taken to begin tackling a morass of soured loans weighing on the state-led banking system.

The economy picked up pace, surpassing even China's growth rate, as optimism grew that Mr. Modi was ushering India toward a more globalized future and a modern economy spurred on by one of the world's largest and youngest populations.

If the Hindu nationalist leanings of Mr. Modi's Bharatiya Janata Party were also apparent -- particularly when halfway through his term Mr. Modi appointed an ideological firebrand priest to head India's largest state -- they mostly took a back seat, especially in international perceptions of India.

As Mr. Modi's first term progressed, however, the internationally minded economists from Harvard University, Columbia University and the University of Chicago left the administration, replaced with lower-profile advisers from Indian institutions. The appetite for difficult economic changes waned, whether it was privatization of the troubled government-owned airline or tougher regulations on lenders.

The economy began a slow slide, particularly in the construction and agriculture industries that India's masses of striving but still poor families depend on heavily for income.

Change of focus

Yet just as signs were emerging that India's economic struggles might undercut the BJP's political fortunes in last year's nationwide election, the focus changed dramatically from economics after a military confrontation with archenemy Pakistan early last year. Mr. Modi pivoted to nationalist identity politics on the surge of angry sentiment against Pakistan that accompanied the capture, and then release, of an Indian fighter pilot after an aerial dogfight.

The BJP presented the election as a choice between a forceful Hindu national leader and opponents it decried as weak in opposing India's Muslim-majority nemesis and supported by India's own 200 million Muslim minority community. Voters set aside economic concerns and delivered the BJP a large majority in Parliament and Mr. Modi a second term.

Since then Mr. Modi has paused only briefly to address the economy -- most notably with a big corporate tax cut after the election -- as the BJP has raced to accomplish controversial initiatives long espoused by the party's most ideological Hindu nationalist supporters.

They banned a special form of divorce that had been allowed under Islamic family law, placed the country's only Muslim-majority state under direct central government control, and cheered when the supreme court agreed to allow a Hindu temple on a site where a mob of activists had torn down a mosque they believed sat atop the birthplace of an important Hindu god.

Each move sparked criticism and questioning from abroad and increased anxiety among some domestically, particularly Muslims and a wider group of Indians concerned the country's democracy is turning in a religiously intolerant and majoritarian direction.

Nationwide protests

Most recently, the introduction of a law that extends a new path to citizenship to nearly every religiously persecuted group in South Asia except Muslims has reinforced those fears, prompting nationwide demonstrations even as Mr. Modi and the BJP extol the new law as a humanitarian act that won't affect Indian Muslims.

Yet even as social discontent rises, the economy's stubborn sluggishness looms as a largely unaddressed menace that could exacerbate those problems, say many economists.

That's especially true in areas where the social tensions have been highest, such as the massive state of Uttar Pradesh, which has a history of violent clashes between Muslims and Indian authorities that have resurfaced with the citizenship law.

"The focus of this government is more on the Hindu (nationalist) agenda, " says A.K. Singh, economist and former director of the Giri Institute of Development Studies, a think tank based in Lucknow. "Although they talk of development, agriculture continues to be in quite a bad shape, and industry, particularly in Uttar Pradesh, is very, very sluggish."

Government officials say they've introduced bold economic reforms and are making progress cleaning up bad loans in the banking system.

But Arvind Subramanian, a Harvard economist who served as Mr. Modi's chief economic adviser during much of his first term, has questioned whether the headline economywide measurements may be flawed, meaning even the 4.5% growth rate the government reported for the latest quarter through September 2019 could be overstated by several percentage points.

He notes that imports, exports, consumption and domestic investment are all in outright decline and overall electricity consumption is flat, an almost unprecedented confluence of bad news since the economy was first liberalized during a crisis in 1991.

He argues that the still-festering load of bad loans at the banks is standing in the way of a near-term economic turnaround by crimping lending. The painful task of reforming the financial sector will likely need to be followed by politically difficult changes to bring more flexibility to land use and labor laws.

So far, the Modi government has shown little new inclination for any of that. "The problem with the Modi government is that there is very little understanding among the top leadership of the economic issues, and expert advice is not followed if it does not go to the liking of Modi," says Satish Misra, a senior fellow with the Observer Research Foundation, a New Delhi-based think tank.

Mr. Spindle is South Asia bureau chief for The Wall Street Journal. Email him at bill.spindle@wsj.com. Krishna Pokharel contributed to this article.

(END) Dow Jones Newswires

January 19, 2020 14:47 ET (19:47 GMT)