Has the Indian Economy Fallen Off A Cliff?

With the recent Euro crisis centered on Greece (here we go again), the Indian economy seems to show signs of trouble. Extracts from the Wall Street Journal Asia gives the following reports:

  1. Last summer the Indian government forecasted that the economy would grow at an annual rate of 9.0% to 9.5% for the next half-decade.
  2. India’s gross domestic product in the first quarter of 2012 grew 5.3%, its slowest quarterly pace since early 2003. This means that India’s economy grew at its slowest pace in almost a decade.
  3. Manufacturing output took the worst hit in the quarter, contracting 0.3% in comparison with a 7.3% increase in the earlier year.
  4. Massive imports of oil have also widened the trade deficit that in turn weakened the rupee (the rupee touched a record low of 56.51 to the US dollar) and pushed up the cost of imported goods and services.
  5. Inflation in the Indian economy has remained high (7%). The central bank raised interest rates 13 times in 2010 and 2011. The policy of high interest rates to put a lid on inflation is not effective as India’s prices are driven by supply constraints in food and energy and not demand.
  6. To compound their problems, the Indian Central Bank is stuck between the fears of slowing economic growth against the country’s failure of getting inflation under control.

Some of the following may be the causes of India’s sluggish economic growth:

  1. Global economic uncertainty over the fate of the Euro.
  2. The Indian government’s failure to push through reforms. Welfare programs that are popular but costly have created an unsustainable budget deficit and caused higher inflation.
  3. The Indian government has failed to take politically difficult actions to cut expenditures. Instead, the government has proposed to raise money by increasing taxes on foreign companies (something foreign companies are very unhappy about).
  4. Indian government has failed to fulfill its promises to open up the local retail sector and other industries to overseas investors. 
  5. Lagged effects of many monetary tightening cycles.

Lessons learnt:

  1. Central banks should consider the causes of inflation before raising interest rates to stem inflationary pressures.
  2. The Indian government should go back to the basics. Balancing its budget is essential. Welfare programs are popular but once implemented may impose a significant exit cost to future generations.
  3. The Indian government should form policies that encourage foreign investments into the country. Foreign businesses in India provide a source of tax revenue that contributes back to the economy.

All in all, there are no substitutes to good central banking and sound government policymaking. Go back to the basics and keep to your promises. Or fall off a cliff…

Comments
One Response to “Has the Indian Economy Fallen Off A Cliff?”
  1. Anonymous says:

    THE ONLY TRUE cause of India’s sluggish economic growth:

    – Their culture

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