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India is experiencing what can only be termed an alarming economic downturn. A rapid slowdown in its economic growth and depletion in its foreign exchange reserves have been compounded by a tumbling currency, yawning current account deficit, and a crippling budget deficit. A series of corruption allegations damaging the credibility of the government have further exacerbated the situation. Such growing difficulties have given birth to a debate over a repeat of the 1991 balance of payments crisis.What has gone wrong in India? Why is a booming economy witnessing burst all around? The Indian economy grew impressively at an annual average rate of 6.4 percent over the last three decades touching an average rate of 7.7 percent during 2002 to 2011 and 8.5 percent per annum during 2008 to 2011. However, it decelerated sharply to five percent in 2013. There are indications that growth may further decelerate to 4.5 percent in the current fiscal year.With sustained economic growth for over three decades,[url=http://www.moncler-sale.org]moncler down jackets[/url], India succeeded in reducing its poverty from 50 percent to about 20 percent. India’s growth has, however, been remarkably unbalanced, with the services sector growing rapidly and the industry growing too sluggishly to absorb labour. Alarmingly,[url=http://www.moncler-sale.org]moncler down jackets[/url], agriculture – on which 60 percent of people depend for their livelihood – registered a growth of barely two percent.Undoubtedly, India’s growth did not benefit the vast majority of its population. The services sector-led growth benefited largely those who were engaged in the IT and Telecom sector, specialising in call centres, writing software for European companies, and providing back-office services for American companies. In short, India’s growth benefited those individuals who were highly skilled and talented. India’s manufacturing sector, which has the capacity to absorb a large number of workers,[url=http://www.moncler-sale.org]moncler sale[/url], did not keep up with the services sector in terms of growth. As a result, its contribution to GDP declined from 17 percent in 1995 to around 14 percent today. Since the greatest beneficiaries of India’s growth have been highly-skilled workers, income disparities have worsened. According to the latest National Sample Survey of India,[url=http://www.moncler-sale.org]moncler sale[/url], the per capita spending of the richest five percent of urban Indians in 2011-12 was 15 times higher than that of the poorest five percent. Twelve years ago, this ratio was 12. Similarly,[url=http://www.moncler-sale.org]moncler on sale[/url], in rural India, the rich-poor disparity grew from seven to nine times. In the largest democracy of the world, it appears that growth has not been democratised. Growth that is not inclusive, broad-based, and which does not benefit the majority of the people is of little good to the country. Besides growth deceleration (India’s economic growth has slowed to 4.4 percent during April-June 2013 quarter), India’s currency has witnessed a free fall in recent months, losing 20 percent of its value and being adjudged as the worst performing currency in the emerging market. Various domestic factors have contributed to the recent currency crisis in India. Growth slowdown to 4.4 percent, widening of current account deficit to 6.7 percent of GDP, rising fiscal deficit to about nine percent of GDP, double-digit inflation,[url=http://www.moncler-sale.org]moncler on sale[/url], weakening of the confidence of global investors on Indian economy, policy inaction, resistance to reform have all played an important role in the free fall of the Indian rupee as well as bringing the country’s growth story to a premature end. In external factors,[url=http://www.moncler-sale.org]moncler outlet[/url], as the US economy gains momentum the Federal Reserves are expected to start winding down the bond-buying stimulus scheme, which has helped fuel an investment splurge in Asia’s emerging market. The expectation of reducing $85 billion per month bond purchases by the Federal Reserves resulted in sucking capital from the emerging market,[url=http://www.moncler-sale.org]discount moncler jackets[/url], including India, which caused a free-fall in currency. The worst is not yet over for the Indian rupee. The reaction in thw currency market will probably depend on the extent to which the Federal Reserves decides to reduce its bond purchases when it meets during September 17-18, 2013. There are indications that the Indian rupee could hit 70 or 72 to the dollar between this month and early next year, a perceptible increase from the current level of 66-67 to the dollar. With a depreciating currency along with an unsustainable current account deficit, crippling budget deficit and slowing growth, India appears to be stuck in an economic mess for some time to come. Why has India landed in such a difficult situation? Its economic growth has been in a downturn for the last three years. It has been decelerating at a faster pace and yet has failed to receive the attention of the government. Assuming that its growth momentum would last forever, the country became complacent. In the process, the government failed to address issues such as deteriorating physical infrastructure,[url=http://www.moncler-sale.org]discount moncler jackets[/url], inflexible labour laws and business regulations. The government concentrated on growth per se and did not bother to look at the sources of growth. Prolonged failure to strengthen infrastructure has caused Indian growth to decelerate. Since the causes of slowdown in growth are longstanding, quick recovery is not on the horizon. India is in election mode and popular measures to win elections appear to be the priority of the government. Hence, structural reforms are likely to remain off the radar till a new government takes charge. In the absence of reforms and continuation of policy inaction, India’s economic woes are likely to persist. Given the country’s demography, approximately one million new job seekers are entering the market every month for which its economy must grow at the rate of at least 7-8 percent per annum. Slower growth is bound to generate fewer jobs, and hence the pool of the unemployed, particularly youth, will continue to rise. India is facing a serious policy dilemma. While the slowdown in economic growth has triggered calls for easing the monetary policy to help businesses and consumers get through this difficult period, the continued decline in the rupee coupled with rising inflation and a large current account deficit have demanded the tightening of the monetary policy. Handling this policy dilemma will be a challenging task for the new governor of the Reserve Bank of India. When Ratan Tata says that India has “lost the confidence of the world”, restoring global investors’ confidence will be yet another challenging task for the government. In sum,[url=http://www.moncler-sale.org]moncler outlet[/url], India needs to pay attention to the quality of growth and not just growth per se. It needs to address the issue of the large current account deficit by tightening its monetary policy on the one hand and curtailing non-essential imports through tariff adjustments on the other. It also needs to address the issue of the crippling budget deficit by avoiding populist measures to provide subsidised food grain to about 810 million Indians with over a trillion rupees of bills – that too, during election year. Instead, if India spent trillions in strengthening infrastructure, it could contribute to growth and create jobs. The only constant is change. The country must continue to reform itself to cope with growing challenges. Postponement of reforms is bound to retard growth and create difficulties for the country. This is a lesson for all of us.The writer is the principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk
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