A wasted sweet spot
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From 2003 to 2007, India experienced heady growth, averaging over 9 per cent a year. When the global economy threatened to melt down in 2008, the Indian slowdown was mild and the bounce back was rapid. These years came on the heels of nearly 15 prior years of dynamism. India had seemingly broken out of its low growth trap. The only competitor in the growth sweepstakes was China. Many predicted that China was bound to slow and India was likely to further accelerate, spurred by a deep well of entrepreneurial energies.
Instead, India's GDP growth has decreased to about 5.5 per cent a year. True, other countries, including China, have also decelerated. But the Indian data shows a deeper malaise. The manufacturing sector has barely grown in recent months. If, as is likely, the double digit growth in construction and finance proves unsustainable, a further drop in growth may be imminent. Aggregate investment spending has been virtually stagnant over the past year and inventories of durable goods, notably cars, are piling up as the Indian consumer takes a deep breath.
Some argue that short-term growth numbers are fickle and could quickly reverse. But the Indian problem is more structurally embedded. Accompanying the slowdown has been persistently high inflation and a rising current account deficit. Inflation has remained among the highest in emerging economies, near or above double digit rates. The current account, which was close to balance in the early 2000s, has turned into a deficit of over four per cent of GDP, an unusually high level for India. Indeed, the trade deficit is eight per cent of GDP. Together, these are signs that India is constrained by supply bottlenecks and is losing international competitiveness.
Some suggest that easier monetary policy will kick-start the Indian economy and a high growth trajectory will re-emerge if a range of reforms are undertaken. Others are even more optimistic, arguing that the reform momentum is irreversible, as the electorate increasingly rewards politicians who deliver results.
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