Economic growth declined sharply across the globe following the trans-Atlantic financial crisis of 2008-09.
Despite what is arguably the greatest growth potential amongst major economies in the world, the Indian economy is stuttering. After a recovery to 8.6 per cent in 2009-10 and 8.9 per cent in 2010-11 after the global meltdown of 2007-08, India’s growth rate declined almost continuously over several successive quarters from Q1 2010-11 to Q1 2012-13. As a result, annual economic growth moderated significantly to 6.7 per cent in 2011-12, 4.5 per cent in 2012-13 and is estimated to be below 5 per cent in 2013-14.
Economic growth declined sharply across the globe following the trans-Atlantic financial crisis of 2008-09. Growth in emerging markets (EMs) still overly dependent on final consumer demand in advanced economies has also declined sharply. India was expected to weather the storm better than its EM peers because of its greater reliance on domestic demand. Over the last three years, the decline in Indian growth has, however, been steeper than in several major Asian EM peers, including China and Indonesia, and indeed emerging Asia taken together. Except China, the BRICS are no doubt growing slower than India, but Indian growth trends need to be assessed by Asian standards. Domestic factors seem to have played a large role in the decline in growth.
The downturn is not simply cyclical. Macroeconomic stabilisation policies — monetary and fiscal — can therefore play only a limited role in remedying the current stagflationary mix of low growth and high inflation. Fiscal and monetary tightening to target inflation would further reduce growth at this juncture. Monetary policy is also a blunt tool for targeting inflation emanating from supply side constraints in agriculture. On the other hand, monetary and fiscal stimulus to target low growth will only add to inflationary pressures, without ramping up supply in the short run.
Recent incremental capital output ratios indicated that it was nevertheless possible to accelerate growth over the short run. This is because the decline in growth was much sharper than the decline in investment, pointing to a decline in the productivity of capital rather than in growth potential. A number of measures to stabilise growth by de-bottlenecking projects under execution and accelerating new projects in the pipeline were consequently put in place over the last 18 months, but they have yet to yield the expected outcome.
Although the decline in growth seems to have bottomed out since the second quarter of 2012-13, manufacturing, exports and new investment remain flat. Current data on lead indicators such as purchase of vehicles, consumer durables and housing also suggest that the recovery is far from certain. There is also a sharp decline in the pipeline of fresh projects that underpin medium-term growth. The overall investment sentiment remains weak and macroeconomic imbalances (the twin current account and fiscal deficits, and a continuing demand-supply gap reflected in high inflation) continue to be high by EM standards. Recent declines in the CAD and inflation are more a reflection of the sharp decline in continued…