Indian economic slump could have been avoided

India has only itself to blame for the economic slump in which it is mired. There have been clear warning signs for most of the year that the economy was slowing dangerously and if the government had taken the necessary steps, the depth of the pullback could have been avoided.

India’s annual economic growth dropped to a nine-year low of 5.3 per cent in the first three months of the year, as the manufacturing sector shrank and the rupee fell to a record low. Investors have lost confidence in the government after it backtracked on a number of essential economic reforms, including the liberalisation of industries and cutting spending on subsidies. The fiscal deficit has been flagged as a concern by the credit rating agencies, a major problem for a country that became one of the fastest growing in the world by attracting foreign investment.

Ironically, compared to the rest of the world, 5,3 per cent is a very competitive growth rate. But India has a large population and disparities in income and living standards that could descend into social and political instability if they are not bridged. This can only be done in a sustainable manner if the country continues to maintain exceptionally high growth rates.

The government must show the political will to reign in spending, especially on subsidies like fuel. It will have to steel itself to face down widespread popular resistance in order to reduce its budget deficit.

The Reserve Bank of India has limited room to further reduce interest rates because of concerns about inflation. However, while the poor often bear the brunt of inflation, economic growth is the best hope to provide them with jobs and improve their lives in the long run. Interest rates must be cut to boost the economy.

There is little chance of the Indian economy significantly picking up in the coming months. Unless the government takes firm and effective action to win back investor confidence, the country will struggle to stay in the economic fast-track.