Narendra Modi’s secret weapon: the Indian consumer

WHEN IT RAINS it pours. In August some parts of India received as much precipitation in one week as they usually do all month. Delhi, India’s capital, escaped the worst of the weather. But politically, it has been a stormy spell for Narendra Modi, the prime minister.

The month dawned with the government reeling from a 25% tariff announced by President Donald Trump at the end of July, a mere point below the original “reciprocal” rate set out in April. A few days later Mr Trump slapped another 25% on India, purportedly to punish it for buying Russian oil. It was a triple blow for Mr Modi. The 50% rate, which came into force on August 27th, will damage India’s ambitions of growing into an export power. It is a hit, too, to the prime minister’s carefully crafted strongman image. And it is a personal blow for a leader who thought he had cultivated a bond with Mr Trump.

The government is under pressure on the domestic front as well. A hasty revision of the voter list in the eastern state of Bihar, which holds elections later this year, has been criticised by opposition figures as an exercise in disfranchisement. Separately, Rahul Gandhi, the leader of the opposition, pointed to what he called irregularities in last year’s general election and accused the Election Commission of India, a constitutional body, of colluding with the ruling party (which it denies).

Yet for all the gathering clouds, Mr Modi still has reason to feel sunny. Electoral lists in a poor mofussil (or rural) state do not set the public’s pulse racing, and in any case the pro-Modi media have hardly played up the allegations. The humiliation meted out to India by Mr Trump, though harder to gloss, has put Indians’ backs up and allowed the government to reassert its long-standing claim of working to make India “self-reliant”. But it is not just his skill at defensive play that should give Mr Modi cause for cheer. It is that things are looking up in the one place voters care about more than any other: their wallets.

One big reason is inflation. Prices in July rose 1.6% year-on-year, the lowest in eight years. That is partly the result of a good winter harvest, which has kept the price of staples and vegetables low. An ample monsoon and a good summer sowing season suggest the trend may last. Analysts expect inflation to remain subdued well into next year.

A little under half of India’s workforce toils in agriculture. Good harvests are reflected in real agricultural wage growth, which hit an eight-year high of 4.5% year-on-year in May, according to Goldman Sachs, a bank. That in turn spurs consumption in the countryside. The rural economy is showing signs of strength after an anaemic post-pandemic period. Government welfare spending, especially targeted at women, has helped, too.

Falling inflation also creates space for India’s central bank to lower the cost of money. Headline interest rates have fallen one percentage point already this year, and some analysts expect another 0.25% cut by December. Leveraged Indians, especially those with mortgages, now have more money to spend.

The ruling party cannot take credit for the monsoon or rate cuts. But it can for a tax bung aimed at middle-income earners. Starting this financial year, which runs from April, anyone earning up to 1.2m rupees ($13,700) will pay no income tax, a rise from 700,000 rupees. That covers more than 85% of people who file tax returns.

A different tax cut will have even more impact. On August 15th Mr Modi announced a long-overdue reform of India’s goods-and-services tax, to be implemented by Diwali, which this year falls in late October. The tax, introduced in 2017, is an unwieldy mess of four rates. It will be simplified to just two—5% for essentials and 18% for everything else (plus a 40% sin rate for a handful of items). Taxes on everything from shoes to cars are likely to fall.

The combination of lower inflation, interest rates and taxes will boost Indian consumption—which accounts for 61% of GDP. For the government, that will help compensate for the hit the economy takes from American tariffs. And for consumers, talk of electoral lists and declining exports will seem abstract compared with the feel-good factor of buying a new washing machine or dining out somewhere nice.

By Diwali, the monsoon will have receded and the skies will once more be clear. As for being a political weather-maker, voters may just credit Mr Modi for bringing out the sun. ■