India registered an annual average growth of almost 9 percent during 2003-04 to 2007-08, successfully sailed through the great recession of 2008 and rebounded after a mild hiccup to a growth of over 8 percent in 2009-10 and 2010-11. However, in the year, i.e. 2011-12, GDP growth is just 6.5 percent and 5.3 percent in the first quarter of current fiscal. To make the matter worse, inflation rate is over 7 percent, a current account gap now at it’s widest since 1980 and a fiscal deficit has been allowed to swell to 5.9 percent of GDP owing to crippling subsidies. Moreover, the prospects for future are also bleak with falling investment rate, downfall in the credit rating of the country, falling FDI, high rate of inflation, falling exports, depreciating Rupee etc.

 

Many economists believe deceleration in the growth of Indian economy as the inevitable consequence of a larger global dynamic while others attribute the growth fatigue to “policy paralysis”. Also a section believes that years of high growth were the fruits of economic reforms of 1991 and a new wave of reforms are needed to fuel a new wave of growth. All the reasons mentioned are true to some extent as in the last few years, no substantial measure had been taken to augment the growth. Policy inertia and the absence of significant reforms to sustain growth have now turned India's slowdown from a cyclical one to something that is structural or systemic. Whatever measures that have been taken by the Reserve Bank of India (RBI) from time to time have proved too meagre to overcome the negative sentiments prevailing in the economy.  Moreover, RBI is often criticised for sacrificing growth at the altar of inflation. 

 

On 25 June 2012, foreign institutional investors' (FIIs) ceiling on investment in government securities (G-Sec) has been raised to $ 20 billion from $ 15 billion by RBI. Moreover, the lock-in period for FII investment up to $ 10 billion into G-Secs has been reduced to three years from five years. However, steps taken by RBI are minimal as the industry is hoping for strong actions this time. Rupee has declined by about 25 per cent in the last 12 months. There is a need for more equity investment in the country and enhancing capabilities for raising exports as at present we import more and export less. 

 

A surge in foreign investment can solve a few of our problems quickly. The anxiety over funding our hefty current account deficit will abate. This would trigger a much-needed appreciation in the rupee and counter some of the inflationary pressures emerging from high oil prices.

 

But to get our economics right, we need to set our political house in order. The current impasse in Indian politics and its drag on economic decision making stem from the fact of coalition politics where rival as well as coalition political entities are not supporting the reforms due to their narrowed interests. Thus the opposition seems to believe that its sole duty is to oppose whatever the government proposes, even if this goes against a larger collective interest.

 

In fact, instead of criticising every policy measure, opposition should come forward with its own policy measures. Regional parties are focused purely on narrow local issues. They are quick to raise an alert whenever they imagine that national economic policy has the slightest chance to impinge on their local interests.

 

This stalemate can only be broken if politicians of all hues take an enlightened view of the larger national interest reach across political aisles and work towards a consensus on key economic policies. For instance, it’s imperative to forge some agreement across party lines on fuel price rationalization. The under-recovery on a litre of diesel hovers at around Rs. 11 and if something is not done urgently, either subsidy will balloon or the oil marketing companies will go bust. More fundamentally, subsidizing fuel is antithetical to the very idea of conservation.

 

Similarly, new set of reforms must aim at reforming the agriculture sector also, with its huge backward and forward linkages; sector has enough potential to give required momentum to the economic juggernaut. Increase agricultural income means increasing the income of 60 percent of the work force, thus creating enough demand for the industrial and service sector and fuelling a consumption driven growth. Similar measures must be taken in secondary (more importantly manufacturing) sector and service sectors. 

 

Objective of the measure must not be limited to merely high growth but the gainful growth where its fruits are percolated to the resident of the country. Such reforms are necessary to make economy come out of fatigue and rejuvenate to tread on the higher growth path.   

 

Stay tuned to MBA Rendezvous for General awareness topics which can be useful in CAT 2012