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Why is India's growth suffering?
Wed, 11 Dec Pre-Open

Economic growth is primarily dependent upon 3 factors namely consumption, investment and government expenditure. While consumption has remained strong, India's growth has been struggling due to slowdown in investments. Higher interest rates have slowed the capex cycle. And with inflation remaining high, rates have remained firm and this has further impacted the capex cycle. With monetary tools being ineffective, the government undertook stimulus measures to boost growth. While this had a positive impact initially, this artificial stimulus has now resulted in widening deficits. In short, India's growth has been struggling due to domestic issues which are self inflicted.

And it seems India is in a deadlock of sorts which will make revival all the more difficult. Higher inflation has created a hole in the pockets of rural Indians. This is eating into their purchasing power. Thus, the consumption story has temporarily hit a roadblock. And as explained earlier, the pace of investments is also likely to remain muted due to the rising cost of capital. Lastly, with deficits already in an uncomfortable zone, government expenditure will remain under check.

The only way to revive growth is to create a climate that shall boost infrastructure investments. While cost of capital is an important factor that determines capex spend, it is not the major hurdle at the moment. The major issue is resistance coming in the form of bureaucratic hurdles. Timely approvals and sanctioning of projects will induce corporates to invest more. Right now, most corporates are sitting on the sidelines. In other words, unnecessary red tapism is hurting the execution cycles.

Another way to revive growth is to reduce rates. But this can happen only if inflation is controlled. This can be done if food & fuel inflation is brought down. While the government can do very little to contain fuel inflation since India imports majority of its crude requirements, it can take steps to improve back end infrastructure thereby reducing food wastage. This shall help curtail food inflation. Unnecessary food wastage and hoarding have been the primary reasons for rising food inflation. If these steps are taken and inflation is controlled rates can be lowered. This will revive growth.

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