The Indian economy has now grown at less than 6% for three quarters in a row. The government said on Friday that economic output expanded by 5.3% in the second quarter of this fiscal.
The previous instance when India saw three running quarters of sub-6% growth was in the aftermath of the Lehman crisis. But there was a sharp rebound soon after—in the second quarter of fiscal year 2010, as massive stimulus packages across the world helped stabilize the global economy. There is unlikely to be such a rebound right now in the third quarter, so it seems likely that there will be another three months of growth below 6%.
Four—or perhaps even five—quarters of such sluggish growth are one indication of how much momentum the Indian economy has lost in recent years. The reasons are well known: an investment collapse, fiscal profligacy, policy paralysis and a weak global economy.
Will the next fiscal year be any better? It seems likely. One source of hope is that lower global oil prices could take some pressure on the twin deficits, as both the import bill and the fuel subsidy bill fall. A second factor could be lower interest rates. India has definitely not won the war against high inflation (irrespective of whether you look at the moving trend in the inflation indices or the GDP deflator), but something like five quarters of growth below what the Reserve Bank of India believes is the potential growth rate for India will make the case for at least mild interest rate cuts more attractive.
A revival in corporate investment spending is key to the recovery. In an event in Mumbai last weekend, finance minister P. Chidambaram indicated that consumption spending can help India maintain growth at current levels, but pushing it up a few notches requires an investment boom (a view, incidentally, that Mint has also articulated earlier). The government seems to be banking a lot on the National Investment Board, which will be headed by the Prime Minister. Chidambaram wants cash-rich public sector companies to either invest in new projects or return money to the government, while he expects the new investment agency to help get private sector projects off the ground.
The unknown factor is reforms. While a lot of political heat has been generated by policies to get foreign direct investment in retail and insurance, the more potent issues are moving to a new tax regime, which includes both the goods and services tax (GST) and the new direct taxes code (DTC), besides pending legislation such as the one on land acquisition. What needs to be watched is whether we will see any progress on these fronts before election fever takes over.