The economic growth numbers to be released on Wednesday are likely to provide further evidence that the Indian economy is slowing. Going by consensus estimates, private sector economists expect the Indian economy will grow at around 6.8% in the second quarter, almost 1 percentage point lower than the number for the first quarter and the lowest in nine quarters.
An immediate growth revival is unlikely. In fact, it seems increasingly probable that the Indian economy will grow at less than 7% this fiscal year, which means growth of less than 6.3% in the third and fourth quarters as well. India is now about 3 percentage points below the quarterly growth rate it regularly clocked during the 2004-08 economic boom.
Part of the slowdown is the unavoidable result of a weak global economy, but part of it is self-inflicted. The lack of economic reforms since 2004 has hurt economic momentum, though with a delay. Meanwhile, fiscal profligacy unleashed after 2009 has been inflationary. The combined effect of a poor investment climate and a stimulus to consumption has been a variant of stagflation—a downward trend in growth and an upward trend in inflation.
The only silver lining in all this is that a further growth slowdown will be disinflationary, as is usually the case when an economy grows below its potential. Data released by the Reserve Bank of India in October as part of its pre-policy economic review shows that growth in gross domestic product is already below the trend; the underperformance may intensify in the coming quarters. This week, Moody’s Analytics, Citigroup and Morgan Stanley released reports that suggest that there will be no immediate respite from the growth slowdown.
India needs to be on a far higher growth trajectory if it is to get its public finances in order in the short term and create economic opportunities for its citizens in the long term. There will be erratic support from the global economy, either as a destination for exports or as a source of foreign capital. Getting out of this hole will require the sort of political leadership that has not been in much evidence in recent years.
The immediate reforms agenda is well known: tax reforms, more banks, privatization, subsidy reforms and a new fiscal pact, for instance. But what is needed right away is a concerted attempt to get investment activity back on track. For a start, a dozen large private sector projects should be put on the fast track, even as a push is provided for infrastructure spending.
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