India’s GDP A Victim Of Pre-Election Uncertainty

Bad news for the Indian economy, worse than expected. In the first trimester of 2012, India’s GDP grew by only 5.3%, the weakest showing in seven years. In the same period in 2011 the GDP grew by 9.2%. This fiscal year, which in India runs from April to March, saw growth of 6.5%, down from 8.4% last year. Not even during the 2008 financial crisis did India see such a sharp drop in growth. The contraction has been felt across the board, with private investments and manufacturing suffering the most. Agriculture and mining also retreated, and the only sector that saw meaningful improvements was in financial services.
Most industrialized nations today can only dream of growth at 5.3%. New Delhi seemed to have set in motion an unstoppable economy, a Shining India that had finally risen from the cycle of hope and illusion, but instead it is trapped by a process that it is unable to govern. The central bank should lower the cost of money, as it did last April, but inflation is still dangerously high at 7%. Less restrictive measures would take pressure off of rising prices.
India could attract foreign investment, but confusing regulatory practices and delays in opening the traditionally protected market have scared off most multinational corporations. The failure to quickly open the supermarket sector is just the most recent example of attitudes that are difficult to change. The slowdown in investments struck primarily in the infrastructure and telecommunications sectors, areas that require a strong government with a clear set of laws.
The executive is currently taking steps to lower the deficit from 5.9% to 5.1% of GDP, a difficult task because it hinges on the structuring of public spending. When the domestic budget is comprised mainly of basic needs assistance to large segments of the population, and with the various elections dotting the Indian calendar, a meaningful reduction of spending seems highly unlikely. The virtuous economic cycle is instead a vicious one. Just two years ago analysts agreed that India’s economic growth would be close to double digits, but that optimism has now vanished and India’s economy will probably be stalled at least until the next elections in 2014.