Growth in India had remained relatively strong until the quarter ending March 2011, but clear signs of slowdown have emerged over the last three to four months. Car sales, two-wheeler sales, modern format retail sales, investment and construction spending appear to be moderating.
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We believe a combination of factors—including persistently high inflation, higher cost of capital, cut in the ratio of fiscal spending to GDP, weak global capital markets environment and slow pace of investment—will cause a further slowdown in growth.
We expect both investment and private consumption growth to be lower than expected earlier. We are cutting GDP growth estimates: on a calendar-year basis, our new growth estimates are 7.3% and 7.8%, down from old forecasts of 7.7% and 8.5% for 2011 and 2012, respectively.
What is the way out of the slowdown? We believe the government needs to adopt a two-pronged strategy.
One, to appoint a powerful group of ministers led by the prime minister to fast track 25-30 core projects, giving them full support on execution in order to kick-start an investment cycle.
Two, to accelerate the pace of policy reforms which have already been in the pipeline for some time.
Graphic by Yogesh Kumar/Mint