How can India regain 8-9% growth?

Tue, 1 Jan Pre-Open

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After a roller coaster ride between 2004 and 2008, 9% economic growth for India was almost taken for granted. The economy was booming and it appeared as if nothing could go wrong with the India growth story. The resilience to 2008 global financial crisis further came as a testament to that belief. It is interesting to note that India grew by almost 8% in the two years after the global crisis unfolded in 2008.

But come 2011 and things started to get shaky. The 8-9% growth suddenly started appearing to be an illusion. But what went wrong suddenly? Worsening global situation was one factor. However, there were other indicators that displayed that the slowdown was also because of internal reasons. For instance, if you look at the performance between the boom period and now there was a stark difference between the fixed investment rate from the private sector. Fixed investment rate also known as Gross Fixed Capital Formation (GFCF) is the rate at which fixed assets are acquired by the business sector. It is a component of GDP that tells how much of the growth came in from investment.

During the period of 2005-2008 the fixed investment rate was on an uptrend. This depicted that growth was driven by investment. And the share of the private corporate sector in this investment was also encouraging. During that period consumption was also booming. As such, the overall growth was healthy. Even after 2008 India displayed strong resilience to slowdown. However, this time around the fixed investment rate fell considerably as private sector contribution registered a drop amidst policy paralysis. Nonetheless, domestic consumption was strong. In addition, export growth was also stable. This enabled India to hold on to the enviable 8% mark when the world was struggling.

However, in 2012, things turned sour. Three years of slowdown on fixed investment started showing its negative effects. Infrastructure constraints worsened and so did employment opportunities. Along with that high inflation and burgeoning deficits took a toll on the economy. Consumption alone was not able to steady the growth ship. As such, the growth rates tumbled.

Thus, the bottomline is that consumption alone cannot savor the India story. Investment led growth is critical for the long term story to sustain. And for that government will have to create a congenial environment for private sector investments. If that does not happen, it will be difficult to regain the 8-9% mark which was once a hallmark.