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India's Third Giant Leap

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What makes India's economy vulnerable?
Wed, 6 Mar Pre-Open

The Indian economy since quite some time now has been in a precarious state. Be it the fiscal deficit, current account deficit, high inflation or slowing growth, the country is facing challenges on multiple fronts. These times are vaguely reminiscent of 1991 when Indian economy was on the verge of a collapse. The country had to pledge its gold with the International Monetary fund (IMF) for an emergency loan. It took drastic reforms for the economy to come out of the woods at that time. These included adopting the then alien concept of liberalization.

If the last two decades are anything to go by, the decision has served us well. However, the impact seems to be fading off. The growth rates after having a decent run have hit the lowest levels in a decade. The real estate market is witnessing inflation. So much so that Indian commercial real estate prices are among the most expensive in the world leading to unviable business and economic conditions. The tax avoidance is become blatant. Currency markets have nosedived. The economy clearly is in a mess and highly vulnerable on account of both domestic and global issues.

At the core of domestic issues lie huge dependence on volatile monsoons, high consumer inflation and political instability. Let us see how. Monsoon failure is likely to stoke food price inflation. At the same time, political instability will hardly let right policies be framed and implemented. On the global front, US government's spending cuts are posing a threat for the rupee. The weakness in the Euro zone, rising oil prices and high dependence on FIIs to plug current account deficit are making things worse. The margin of safety is almost non existent with the high current account deficit we are running and thinning foreign reserves.

Basically, the economy is flashing red signals. While the Finance Minister has acknowledged the problem in the Union Budget, it is time to take some hard economic decisions to steer the economy back in the right direction. These will include cutting undisciplined spending, reducing subsidies and taking bold reform measures, not just in words but in action.

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