Why did the India growth story go awry?

Tue, 3 Sep Pre-Open

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India's Gross Domestic Product (GDP) growth for the April-June quarter came in at 4.4%. This is the third consecutive quarter where we have grown by less than 5%. The current growth is also the lowest ever reported over the last 4 years. Considering the current mess we are in, the 8-9% growth levels seem to be elusive figures now.

But what has landed us in the soup? About 2-3 years ago India's growth story was shining like a bright sun. And now there are very few takers for it. Let us analyze what went wrong in the last couple of years.

In the past, savings rate was healthy in India. Even now the savings rate in India is much better (30.8% as a percentage of GDP in 2012) compared to our western counterparts. But the same has been declining steadily over the past 2-3 years. Declining savings means investments are taking a backseat. And with investments slowing down growth suffered.

During the same time the government rolled out fiscal stimulus to bring growth back on track. However, this ruined public finances. Fiscal deficit widened and reached alarming levels. Various subsidy programs created a further mess. Rising fiscal deficit made it difficult for the government to increase spending and boost growth.

Further, regulatory and environmental issues also created obstacles for growth. The demon of inflation poked its head in between. Rising inflation meant that monetary policy tools were ineffective to revive growth. Thus, India was in midst of a situation where no measure was proving sufficient to revive growth. In fact, this resulted in both the Reserve Bank of India (RBI) and the finance ministry being at loggerheads. RBI was adamant on its stance with respect to not lowering rates unless inflation was brought under control. However, the finance ministry took pot shots at RBI's strategy for not lowering rates as this was stifling growth. In short, there was no clear roadmap to revive growth. But people indulged in a blame game instead. What exacerbated the entire problem was the US Fed's statement on QE tapering. This led to a sudden outflow of money from Indian markets which pressurized the rupee. The depreciating currency further worsened the current account deficit (CAD) as imports became expensive. This fuelled inflation worries given that India imports a large part of its crude oil requirements. Worsening CAD and fiscal position has made the government almost helpless.

However, it would not be wrong to say that the current pain is also self inflicted. Government's inability to manage public finances and CAD has hurt the growth prospects. Also, regulatory hurdles and policy issues meant that any solution to revive the economy took a long time to materialize. If the same situation continues, growth may continue to suffer. Remedial measures, if any, have to be executed and not just remain on paper as has happened in the past.