A new law on Indian citizenship is threatening to pull Prime Minister Narendra Modi's focus away from a flagging economy as protests and criticism builds against the divisive plan.
The government was forced to call in the army to quell protests in some parts of the country this week after the parliament passed legislation that will prevent undocumented Muslim migrants from three neighboring countries becoming citizens. The change to the law has been criticized by opposition parties as well as by a U.S. federal commission, who say India is moving away from the values of its secular constitution.
"There is an economic cost attached to all this, given all the violence that is taking place," said Amitabh Dubey, an analyst at TS Lombard in New Delhi. Modi's Bharatiya Janata Party is fulfilling the promises made to supporters who brought it back to power with a bigger mandate and "it isn't surprising that they have dropped the ball on turning around the economy and focusing on delivering what they think is more important and which will reap political dividends for them."
Less than a month ago, Modi's government was ramping up programs to help boost economic growth from a six-year low of 4.5%. His administration announced the biggest privatization drive in more than a decade, weeks after cutting corporate taxes by $20 billion and taking steps to prop up weak banks.
At the same time, the Reserve Bank of India has cut interest rates five times this year to support growth. Still, there's little sign of a revival with consumer demand and investment remaining weak.
"The focus on the social agenda has come at the expense of the economic agenda," Akhil Bery, South Asia analyst at risk consultancy Eurasia Group, wrote in a note. "The government has been relying on the Reserve Bank of India to cut interest rates in order to boost liquidity in the system, but has so far, not focused on major economic reforms to cut red tape and boost investment."
The door for further central bank rate cuts is closing, with policy makers last week keeping interest rates unchanged after a spike in inflation took them by surprise.
The protests over the citizenship law risks taking the government's attention away from immediate problems facing the economy. Unemployment is at a more than four-decade high, a drag on consumer confidence and spending in an economy where consumption makes up about 60% of GDP.
Finance Minister Nirmala Sitharaman met with reporters on Friday to share the progress on measures unveiled by the government so far to revive consumption. But she parried questions on whether the slowdown has bottomed out.
"I am not engaging in predicting where the economy is right now, but I am focusing on working to address issues," Sitharaman said.
The new law "takes the focus away from important economic issues," said Prabhat Patnaik, an economist and a professor emeritus at the Jawaharlal Nehru University in New Delhi. "The more you have disruptions to normal life, the more the impact on economy and production."
— With assistance by Shruti Srivastava, and Jeanette Rodrigues
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement."