An Indian view on history, current affairs and politics

March 27, 2023

What went wrong with the India growth story !


I still remember the TV debates about double digit growth that India was poised to attain as the world was coming out of a global recession. This was barely two years back. So what went so wrong in last two years for the economic discourse to take an abrupt turn? From stock markets to political debates the overwhelming sentiment is one that of despair.  Investor confidence seems shaken and flight of capital is evident across the board. India’s Current Account Deficit is at 4.8% of GDP, a record high, While rupee has depreciated 20% annually to touch a record low of 68 to a $. Industrial growth has gone into negative territory and the much touted GDP growth rate is at 4.8%. Consumer inflation is at 10% and external debt maturing in this fiscal year exceeds $ 170 billion, not to mention people have started losing Jobs already. Experts have already started comparing the situation to 1991. India was in deep trouble during that time. We had foreign exchange reserves to sustain barely three weeks of imports. The danger of defaulting on balance of payments was very real and India had to mortgage 67 tonnes of gold to secure a $2 billion IMF loan. Seems we’re again in an economic crisis, albeit in its early stages.

Following the opening up of economy in 1991 and consistent reform policies pursued by subsequent governments, the inflow of Foreign Direct Investment increased. States vying for FDI came up with investor friendly policies and tax breaks that further boosted investor confidence and attracted foreign capital. With CAD, Fiscal Deficit and inflation within manageable limits, India enjoyed years of unprecedented growth. And yet, India was never completely free of the issues that have plagued the nation perennially. Impregnable bureaucracy and Red tapism,  Political instability, rampant corruption and scams coexisted with 8% growth figure.

So what changed fundamentally? For an economy so dependent on Foreign Investment, investor confidence is a vital indicator of which way the economy is headed. My view is that the first blow came from Singur agitation against Tata. What followed was a series of such events that ensured mega projects kept getting delayed on one pretext or another. Land acquisitions, environmental clearances, Red tape, court cases, scams and to top it all the much touted policy paralysis contributed to declining investor confidence. POSCO is the recent example of how a mega project failed to take off due to many of the above reasons.

A second front was opened against the economy in pre election year of 2008 when a wave of populist schemes (mainly increase in salaries, subsidies and NREGA) ensured the combined deficit crossed 10% of GDP. As a result the persisting fiscal deficits have led to long bouts of inflation, high interest rates, reduced public savings and fed increasing CAD.

The monetary policies pursued by RBI were yet another blow to the economic climate. Increased interest rates across entire term structure reduced liquidity and further dented the capacity for industries to expand. The measures curtailed credit growth for productive purposes and made government borrowing more difficult further weakening the health of banks (mainly government).

History has shown us that countries in far worse situation than ours have enjoyed continued foreign investment and stable growth because of business friendly perception they had among investors. The introduction of Food Security Bill has clearly conveyed to businesses that country is not interested in introducing Fiscal reforms which are needed to stem the economic decline. With a crisis in Syria looming large chances are that this decline is only going to speed up.