The latest economic data reinforces the fear that India now faces the toxic combination of lower growth and higher inflation. The solution to both these problems lies in more investments by the private sector.
Companies have not been spending to build new capacity. There is also reason to believe that they may hold back on capex even as they hit capacity constraints later this year. The problem is not rising interest rates. The problem is policy paralysis. Key reforms in areas such as land acquisition and modern retail have been on the back burner. Corruption scandals have vitiated the investment climate even more.
The focus of policy right now is on demand management, through plans to curb government spending and higher interest rates. But what India needs right now is supply-side solutions that will raise the productive capacity of the Indian economy. Policy paralysis is the big enemy.