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Is the worst over for the Indian economy?
Wed, 4 Dec Pre-Open

Recently, India's GDP growth numbers for the September 2013 quarter were declared. The reported GDP stood at 4.8% YoY. Although on the lower side, this was still better than the growth in the June 2013 quarter, which stood at 4.4%. GDP growth for India has been slowing down for the past several quarters now. The reasons for this are plenty. Failure to implement reforms and poor infrastructure are some of the main culprits that are impeding India's growth. That inflation remains high is only making matters worse. That has only led to an increase in interest rates as the RBI tries to bring inflation under control. Thus, higher interest rates coupled with the government's inability to address supply side bottlenecks have been taking a toll on the Indian economy.

But is the worst now over for the Indian economy? Can one expect an improvement thereon? An article in Business standard highlights one more economic indicator. The gross fixed capital formation (GFCF) is at 33.6% vs. 32.6% in 1QFY13. The GFCF measures the creation of new productive capacity in the economy. When we look at the 1997-2002 period when GDP growth was at around 5%, the GSCF stood at around 25%. Thus these numbers suggest that investment activity is actually progressing well, against the general perception that investment climate is depressing. So what does it mean?

While investment is taking place, the same is still not visible in GDP growth. One reason stated for this is that there is a disparity in capacity creation across sectors. This in turn has resulted in less-than-optimal utilisation of capacities. This means that there will have to be significant efforts required on the part of the government to address the issue of capacity constraints and create some sort of a balance so that the rise in investment activity gets reflected in GDP growth.

It is quite clear that the RBI alone cannot be responsible in ensuring that India's GDP growth reaches the 8-9% mark on a sustainable basis. In other words, rate cuts alone cannot take India's growth to the next level. For that, the government will need to take more initiative and introduce reforms. Once many of India's structural problems are addressed, only then can the country boast of higher growth in GDP.

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