Within A year of the Lehman Brothers collapse, India’s economy roared, nearly touching 9% in 2009-10 and 2000-11.
But the happy augury was short-lived, for we have since been on such a downhill journey, achieving even 5% growth has become a big challenge.
Until now, only investment was sluggish, but recent GDP data show a very sharp drop in private consumption demand as well.
In the short run, policymakers do not have instruments to fire up growth; high deficits do not permit increase in government spending to create demand and high inflation precludes interest-rate cuts.
The Reserve Bank of India recently raised interest rates to tame inflation, which continues to stay above its tolerance level.
In an environment where private sector is unable able to surge independently due to poor investment climate and waning consumption demand, it is no surprise that growth has slipped so sharply.
Two drivers of growth this year — agriculture and exports — cannot crank up GDP beyond 5% in this fiscal, in my opinion.
Good monsoons have come to the rescue and we expect agricultural GDP to grow more than double to 4.5 % over last year.
It will benefit some sectors with rural exposure such as tractors and two-wheelers.
But a large part of the industry particularly linked to investment and discretionary consumer spending will grow slower than last year.
Services growth, too, projected to dip to 6.5% from 7.1% last year.
There is some calm on the currency front as current account deficit (CAD) is heading down and foreign inflows have improved.
CAD is shrinking due to improving exports, weak imports (partly engineered through restrictions on gold) and rising remittances. Foreign inflows have picked up as a result of postponement of tapering of quantitative easing by the US Fede, but that’s just shock deferred.
This is, therefore, an uneasy calm and India is not out of the woods as far as external vulnerability is concerned.
While not much improvement is expected on the growth front in the short run, medium-term expectations, too, have been scaled down. The Planning Commission target of 8% for the 12th Plan period (2012-13 to 2016-17) is clearly out of reach.
Achieving even 6.5% would mean GDP growth of 7.5% in each of the balance three years — an uphill task indeed.
The analogy of planting a car engine on a handcart is germane here.
Such a jiggered-up vehicle will sprint for a while but the wheels — and probably other parts — will come off soon because it cannot handle greater speeds.
The same is true of an economy: if it grows beyond its potential, macroeconomic imbalances such as inflation show up.
Before India’s aspires for a sustainable growth of 8-9 %, it will have to strengthen its innards — such as infrastructure, deficits, governance and food inflation.
Only then will it have the cranking power-and the chassis- to move ahead sustainably.
(Views are personal)