WHAT WENT WRONG WITH INDIA’S GROWTH STORY

Some 4-5 years back when Lehman brothers fallen, the world was gripped by fear, and the fear was not wrong, but in the middle of the global crisis there were rescuers which ensured that crisis would not be deepened and not be as painful as it was during great depression, these rescuers were surely the emerging economies including  India. It not only shown the strength but also promised that the pillars of its economy are strong enough to withstand any global crisis. Take the odd; the government of the day was supported by the leftists, known for their strong anti reform agenda, India was darling of global financial analysts, magazine, rating agencies, it is substantiated by the fact that India received the largest amount of FDI/FII inflow in crisis period when most of the countries were desperately witnessing outflow that left these economies bleeding.

Now when crisis is partially gone, lefts have left the government, the situation is diametrically opposite than what was thought, the credit rating agencies, like S&P, moodies have downgraded India’s rating to negative grade, currency is the worst performer, growth is losing its steam, FDI/ FII has fallen, and one of the most influential financial columnists Ruchir Sharma has revealed in his book BREAKOUT NATIONS that it was not inherent strength of the engine rather it was high tide that led to sporadic rise of India’s economic boat. So what went wrong in these years, people suggests mainly corruption, lack of political will and global factors.

I sincerely doubt that any of the above was absent in those years, I mean, corruption is not a new discovery and political bargain is the order of the day in the era of coalition politics, probably the responsible factors lies somewhere else.

To my mind, the way corruption is handled is the key issue, US corporate has bigger corruption cases than India’s own, but the key difference is the way they are handled at both of the places, west media has always been very critical of emerging nations growth story so little cooling off of the growth is projected as emerging nations failing story, and no doubt Indian media started aping it, we must understand that fundamentals like saving , investment rates, market capitalisation etc are still strong, there is bit of truth in the high tide story but the engine has gotten strong too.

The world economy is facing slow down, the effects of crisis on emerging economies come with a lag, and this is probably the most important reason. The supply of goods and services could not kept pace with the huge welfare expenditure across the sectors that created nflation conditions, in this scenario when rate of interest was increased to tap the inflation, it increased the cost of finances and production thus inflation became spiral, once inflation became secular, it created conditions for rupee fall and had its toll on growth rate.

The real point is that this phenomenon is purely economic, we need to form sound economic policies rather than becoming directionless, it is true that low corruption economy has better chances to grow, but in our cases, the urgency is little different, of course we should keep in mind that  long term objectives should be of reducing corruption.