The supply side battle
The ongoing economic recovery cannot strengthen unless companies begin to build new capacity
The new data on economic activity shows that the recovery continues to strengthen. That is the good news. The sobering fact is that the Indian economy continues to be too dependent on consumer spending. Private sector investment activity is weak. Foreign demand cannot be counted on because of the fragile global economy. The price deflators also suggest that inflation is bottoming out —a risk that has not got the attention it deserves.
The ongoing economic recovery cannot strengthen unless companies begin to build new capacity. Public investment cannot do the job alone. Also, never underestimate the possibility of higher inflation in India as consumer spending strengthens while the rigidities on the supply side are not addressed, even though there is ample excess capacity right now. The Narendra Modi government should realize that the supply-side battle is a far more difficult one — and one that needs more economic reforms.