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ShareThe global economy has entered a period of recession and is expected to contract for the first time since World War II. India too has experienced a loss in growth momentum from a high growth trajectory of close to 9% over the last five years (2003-08) to 6.7% in 2008-09.
The industrial sector has been adversely impacted by a slowdown in domestic consumer spending, contraction in external demand and tightening of external financing resources.
The services sector, which has been the driver of growth, has also experienced some moderation in the face of dampened growth, notably in the trade, hotels, transport and communication sectors.
The agriculture sector has recorded a deceleration in growth due to reduced kharif crop output. The global crisis has also led to deterioration in India's balance of payments position, largely on account of a widening of trade deficit coupled with a sharp reversal in portfolio flows.
Despite these contractions, there appear to be reasons for optimism with evidence of early signs of a recovery:
GDP growth in Q4 2008-09 has stabilized, marking an end to three successive quarters of deceleration in economic activity.
There is talk of 'decoupling version 2' with some of the biggest emerging economies, notably China, Brazil and India likely to recover faster than the developed economies.
The government's fiscal stimulus packages, the RBI's monetary easing steps, the reduced political risks and improvement in investor confidence levels (increased FII inflows since the start of FY 2009-10) are expected to add to the growth momentum.
Triggers for these changes
The current crisis, which has its roots in the US subprime mortgage market, could be linked to a sustained period of loose monetary policy, a low interest-rate regime and lax financial regulation and supervision which encouraged excessive risk taking in search for higher yields. Growing financial innovation and securitisation led to these mortgage loans being sold to investors across the globe.
The subsequent tightening of monetary policy to address rising inflation levels caused the asset bubble to burst, leading to a rise in default in mortgage payments. The impact of the financial crisis on the domestic economy can be traced to India's rapid integration with the global economy in recent years.
This is highlighted by the rise in the share of India's two-way trade in GDP from 21.2% in 1997-98 to 34.7% in 2007-08. The growing importance of foreign funding to meet domestic corporates' investment requirements also underscores India's growing linkages with the global economy.
What's holding us back?
While the crisis in the global economy have moderated growth levels, structural constraints have come in the way of India achieving its true growth potential in the medium term.
Bottlenecks in India's agriculture and infrastructure sectors have impeded growth. Agriculture suffers from poor yields, inadequate irrigation, poor marketing infrastructure, inadequate finance and adoption of modern technology. Infrastructure is constrained on account of power shortages, poor roads, ports and airports which act as a drag on the country's overall GDP.
Finally, there needs to be a return to fiscal prudence and consolidation at the earliest to support the goal of sustainable growth.
An economic reform agenda
The way forward could be through an effective combination of monetary and fiscal measures. The government needs to address macroeconomic issues that strengthen aggregate demand, boost credit growth and play a vital role in turning both consumer and investor sentiment as well as provide for sectoral strategies to look at the micro-level problems of the economy:
Tapping buoyancy in rural demand by boosting the pace of retail trade in rural areas.
Fiscal measures to place more money in the hands of those with higher marginal propensity to consume and continuation of schemes like NREGS could support farm income and provide the right stimulus to demand.
Steps to revisit the administered interest-rate structure would prompt banks to lower rates further, boosting credit growth. A review of the BPLR system would also assist in improving the transmission of monetary policy and make the system more transparent.
Measures to support affordable housing will serve as an integral part of economic development and provide significant positive externalities and linkages benefiting manufacturing.
Improvement in marketing facilities, supply-chain infrastructure, greater awareness about global standards and scientific grading could together help address the current slack in Indian agriculture, which has the potential to raise India's GDP.
A comprehensive and robust policy on infrastructure, with the concurrence of the various ministries, should be put in place. Measures proposed by the government for modernisation and capacity addition in key sectors as well as the emphasis on preparing better PPP models to get more investment for infrastructure could provide a much needed boost to the sector.
With the slowdown in western markets, India should speed up the process of entering into regional trade agreements. In the medium term, strengthening of trade with Asian economies -- who would be equally keen to tap into India's markets -- could help reduce India's trade deficit.
Improvement in central-state coordination to increase fiscal discipline and reduce inefficiencies.
Lastly, an effective monitoring and delivery mechanism may be set up to accentuate the positive effects of the initiatives and measures announced.
The writer is leader, markets & industries, PricewaterhouseCoopers
