Aug 17, 2013

Is India's growth story over?

Indian national flag
It is an understatement to say that the Manmohan Singh-led Indian government is in troubled waters.

Politically, a charismatic opposition leader, Narendra Modi, has stolen the thunder and has become the most talked-about person, both among the media and the citizens.

In fact, even foreign governments have started thinking that he may replace Manmohan Singh as the Prime Minister in the next general elections, scheduled to be held before May 2014.

Economically, the situation is even more dire:
  1. The economy is growing at its slowest pace in a decade - it is expected to fall from a high of an average 8% annual growth to a mere 5% in FY2013-14
  2. The stock market is in doldrums - the benchmark BSE Sensex index lost nearly 4% last Friday, its largest single-day drop in almost two years
  3. The Indian currency, already the region's worst performer this year, is touching daily new lows against the U.S. dollar - this has worsened the current account deficit to 4.8% of GDP

The underlying reasons for the malaise are not too difficult to understand:
  • Politically, the government has been dogged by increasing number and intensity of corruption and nepotism charges; it is feared that the upcoming general elections will make the situation worse
  • Economically, the government has mostly been reactive to the changing macro-economic environment; it has responded to the challenges by a hodgepodge of policies, with the end result being "one step forward, two backward" in many situations
So, will the situation change for better or worse? This is a 1.873 trillion USD question!

India's fortunes, in the short term, will surely be adversely affected by the upcoming general elections. The Congress-led government will announce more & more populist measures even as it shies away from taking the hard decisions needed to jump-start the economy.

The picture looks brighter in the long term! India's demographic advantages, the consumption-led economy, a resilient middle-class, all point to a brighter future ahead for India.

See also: Can India's demographics make her a BRIC leader?