India's economy falls short of lofty aspirations

Published: 14th February 2013 05:37 PM  |   Last Updated: 14th February 2013 05:37 PM   |  A+A-


India's statistics agency is forecasting economic growth of only 5 percent for the fiscal year ending March, the weakest in a decade. It's a big comedown from just a couple of years ago when officials boasted India could grow at 10 percent or more a year and overtake China.

The finance ministry has accused the statistics agency of being too pessimistic. That spat aside, there's no question that Asia's third-largest economy is now not growing fast enough to produce sufficient jobs for its burgeoning youth population.

Here are some questions and answers on India's slump.

Q: Two years ago, India was growing at 9 percent or more, as fast as China. What happened?

Investment in the economy has slowed sharply because many businesses, foreign and local, have little confidence the government will make significant improvements to India's creaking infrastructure, ponderous bureaucracy and extravagant corruption. Power outages last year affecting hundreds of millions dramatically underlined strains on the power grid. The poor condition of highways and rail is another major bottleneck for business. Ordinary Indians, meanwhile, have slowed spending because of high inflation, which also inhibits investment, since weaker consumer demand gives businesses less reason to expand.

Q: Is 5 percent growth really that bad? The U.S., Japan and Europe would be happy to grow that fast.

India's needs fast growth to lift more people out of poverty and provide enough jobs for its swelling population. Average income per person was about $1,500 in 2011, not even one thirtieth of average incomes in the U.S. More than half of India's 1.2 billion people are under 30 years old and some 13 million Indians reach working age each year, according to the IMF. India's finance ministry estimates the country needs at least 8 percent growth each year to create enough new jobs.

Q: What does India's slump mean for the world economy?

It dims hopes that India along with China will help drive a rebound in a global economy that is weighed down by a sluggish U.S. recovery and recession in Europe. Global companies from automakers to retailers who hoped Indian consumers would drive new revenues might have to scale back their plans for the country.

Q: Can India's central bank help?

Its scope to cut interest rates to boost the economy has been limited by high inflation. Central bankers feared that lower interest rates would only worsen inflation and further impoverish many Indians by pushing up prices for food and other essentials. So they kept interest rates high until inflation showed signs of moderating. It reached a three-year low of 7.2 percent in December and the Reserve Bank of India last month made a modest cut to its main lending rate. But analysts say inflation is still at a worrisome level and any further interest rate cuts likely won't be big enough to have much impact on borrowing and investment. And as the central bank has repeatedly said, India's economic problems are too complex to be solved by it alone.

Q: Are India's deficits also a problem?

India's government is running a steep budget deficit, spending more than it collects in taxes. The country also has a big current account deficit because its imports, swelled by oil and gold, exceed exports. The deficits aren't by definition a problem as long as investors are willing to finance them and believe the debts will ultimately be repaid. If doubt creeps in, India's creditors would demand higher rates of interest to continue financing the country. In extreme circumstances that could lead to a government default or balance of payments crisis. Right now, the twin deficits are a symptom of India's economic weaknesses and show its vulnerability. India's government wants to reduce its budget deficit but has to proceed cautiously, because a too sharp withdrawal of deficit spending would further slow economic growth.

Q: It sounds like India's problems are too hard to solve.

They're difficult, but there are some steps India's government can take. It can reform regulations to make doing business easier. The World Bank's ease-of-business survey ranks India 132 of 185 countries and lists India as one of the world's five worst countries both in enforcing contracts and dealing with construction permits. Businesses say the government must also follow through on pro-growth policies such as opening retail and aviation to more foreign investment and forming a special commission to solve delays blocking major infrastructure projects. It would also help to streamline the country's notoriously tangled bureaucracy.

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