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The Indian economy slips into a slumber

By Dr. J. Dennis Rajakumar

The writing is on the wall. The Indian GDP growth has decelerated to 5.3 percent in the second quarter of 2012, as per the data released by the Central Statistical Organization (CSO), Government of India. This is worrisome as the economy had grown by 6.7 percent in the same period a year ago. It is evident that the Indian economy is unlikely to achieve 7.6 percent growth as projected in the Union Budget 2012-13.

Not only has the Finance Minister scaled down the projection to 5.5-6 percent growth for 2012-13, the Reserve Bank of India (RBI) too revised its estimates, down from 6.5 percent to 5.8 percent, for the same period. Painfully, the International Monetary Fund (IMF) now expects India to achieve 4.9 percent growth during the current fiscal year. Still, robust when compared to OECD standards, India’s economic growth has dwindled quite dramatically from its highest point of 9.6 percent in 2006-07.

Sharply decelerating growth calls for speedy interventions by the policy makers on both the supply side and the demand side of the equation. On the supply side, recent policy reforms announced by the government covering several sectors, particularly the entry of FDI in retail, are expected to remove these barriers and facilitate growth. While one may appreciate the policy stance of the government from the point view of stimulating growth, demand side interventions also merit consideration. Private final consumption expenditure, a major constituent of aggregate demand in India, which accounts for a little over 58 percent of income in real terms, grew at the rate of 5 percent in 2011-12 as against 8.2 percent in 2010-11. Gross fixed capital formation, which contributes to the building up of the capital stock in the country, accounted for around 32 percent of income but grew at the rate of 5.5 percent in 2011-12 as compared to 7.5 percent in 2010-11. The growth rate of the government’s final consumption expenditure has also declined to 5.1 percent in 2011-12 from 7.8 percent in 2010-11.

Reviving growth would require measures that clearly go beyond supply and demand side considerations and the curbing a stubborn fiscal deficit due to financial over borrowing. In the present scenario, the resurgence of investment activities and private consumption spending— both demand and supply side economic – requires that better money supply and monetary management be initiated by the central bank to stimulate investment and consumption spending in the economy.

While the choice of monetary policy is impeccable, keen interest rate management is needed to inject stronger liquidity into the banking sector and free up idling reserves of cash locked up in household savings. In response, the RBI has reduced the cash reserve ratio (CRR) from 6 percent in January 2012 to 4.25 percent, effective November 2012— intending to make the economy more liquid, which suggests a trade-off between controlling inflation (projected to be at 7.5 percent by March 2013) and stimulating growth. It remains to be seen if money supply adjustments alone will pull the Indian economy out of its slumber, or else continue to agonise and baffle the government, investors and policy makers for more time to come.

The author is a faculty at the Alliance School of Business, Alliance University

Note: This is a sponsored article and has NOT been written by the PaGaLGuY Editorial Team. It is intended from an informational perspective only and it is upto the readers to research and verify the claims and judgements in the article before reaching a conclusion

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