Can India achieve 9% growth in next five years?

Growth story of India was different when India was growing at 9% last decade but 2008 subprime crisis was a stumbling block in India’s growth and also bad governance, policy paralysis, lack of strong macroeconomic policy brought down India’s growth to 4.7% in 2013-14. So now question arises that can India achieve 9% as it did in last decade, the research team of  Morgan Stanley believes that superlative growth rates achieved by India between 2003 and 2008 which was above 8% was extremely short term growth it was driven by a huge gush of global liquidity and did not pave the way for future high growth rates, the was a giant size growth of emerging markets from 2003 to 2008 India was carried away with the global growth current.

    All emerging markets were doing well and what we are seeing now credit bubble has burst and all emerging markets growth rates were toppled, in a nutshell it was all about liquidity. It was not really economic policies or government played any role in India’s growth story also deteriorating macro-economic fundamentals ,rising fiscal deficits, high inflation rates has resulted in economic slowdown due to policy roadblocks in policy making now answering the question and understand the growth story of India to re-establish at 9% growth rate in next five years driven by the fact that we got pent up demand in the country it is not going to be easy ride as it was when there was euphoria of global growth because of liquidity in the emerging markets, now story is changing now Mr. narendra modi in driving seat but still India will grow at 7% as shown in the IMF chart but to reach to 9% or double digit growth would be highly unlikely he is intended striking balance between farming , small firms and global companies is required apparently Mr. modi having run gujrat successfully now he is facing far harder challenge of running India his advantages are administrative competence, control over his party and a majority in parliament that would actually lead to ease of decision making which was not possible in previous government now the major economical challenges he is facings are stagflation growth from 4 to 5% almost half the level at the peak, rising inflation, declining public finances and current account deficit as we all know a decade India apparently growing at 9% now seems to a heyday, for that rates of saving and investment around almost 30% GDP that would help on financing factories infrastructure projects, lifting India's potential unlike most Asian countries India has brilliant entrepreneur who could wheel and deal the country to prosperity.     

How we can bring growth back to 9% growth? What exactly had gone wrong?

     Saving and investment of the country is taking a hit rates dipped and their mixed had also deteriorated high inflation led household to buy gold, shifting money from banking system where it can be productively employed and mix of corruption excessive leverage, incompetence have led private companies to have major part of GDP infrastructure still a bone of contention. Industries that are close to state involve corruption on a grand scale bribes paid to politicians and government officials past decade of anywhere between $4 billion to $12 billion. On top of it only 3% Indian pay income tax leaving a hole in government finances about 90% of jobs are informal leading to poverty. Agriculture is feudal and food shortage cause inflation. India is suppose to be manufacturing hub or industrializing but manufacturing contributes only 15% of GDP and 11% of jobs and day by days its share has been falling power and electricity generation is still a major problem because of that industry’s growth is stagnant, inadequate supply of infrastructure it is the biggest hindrance to doing business also discontent within the business community remains high about the lack of reforms and perceived ability of government to push them through, tax regulations in India should change the country’s supply of transport, ICT And energy infrastructure remains largely inefficient and ill adapted to the needs of the economy, poor educational standard has become another major problem although India has benefited from high percent English speakers there is still high level of illiteracy Amongst the population, it is worse in rural areas and amongst women. Over 50% of Indian women are illiterate. This limits economic development and a more skilled workforce. Touching upon rigid labour law which discourages firm from expanding it also discourages foreign investment. Trades unions have an important political power base and government often shy away from tackling potentially political sensitive labour issues, high level of private debt amount of lending in India grown by 30% in the past year. However there are concerns about the risk of such a loans. If they are dependent on rising property prices it could be problematic moreover if inflation increases further it may force RBI to increase interest rate. If interest rates rise substantially it will leave those indebted facing rising interest payments and potentially reducing consumer spending in the future with that agriculture sector is inefficient agriculture produces 17.4% economic output but over 51% of workforce employed in agriculture this is the most inefficient sector of economy and reform has proved slow. The inflation rate one of the major problems behind decelerating India’s growth the inflation rate of the economy as a whole has been consistently high over the last 5 years it has been a double digit inflation. Over the past decade there has been sharp wage increases fuelled by expectations of even greater increase in wealth and incomes turning inflation into less potent electoral threat. Having considered all these threats to Indian economy it seems unlikely to grow at 9%these are the hindrance in India’s growth which can not be fixed overnight however it is possible for India to grow at 6.5% to 7% provided that all said is done to fix these economic problems.

           We also can not turn our blind eye to quantitative easing tapering  which US fed will be forced to announce to coming years lets look at it how it will affect Indian economy the easiest way to stimulate economic growth that involves a lot of risk for the economy. In 2011 before the first round of tapering  the 10 years Indian government gave yield of 7.92% and the whole dollar exchange rate was 44.75. however in 2011 when the first round of begun in the US, FII assumed a short in the Indian bond market selling huge volumes the price of G-SEC fell and the yield rose to 8055% because of huge selling the FIIs took  more dollars along with them out of the country, by the beginning of 2013 every one was waiting for US economic data. The GDP had grown by 2.8% and in May 2013 fed made a statement that fed might consider tapering very soon. In FY 13, Indian economy grew by decade low 4.8% and the dollar exchange rate was 54.99 when fed announced tapering might start very soon, in the hope of better yields on US treasury bills there was a chaos in India. FIIs across the world shorted their position in India, In the hope of better return in US in India CAD(Current Account Deficit) in the previous financial year FY13 was 4.8% of GDP consumer price index (CPI) was at 10% and wholesale price index (CPI) was at 6%. On august 28,2013 rupee touched all time low of 69 against one dollar. Indian forex reserve was at $276 billion dollar. The demand for dollar grew from two fronts. One on high import on non essential commodities particularly gems and jewelry and the other demand by oil marketing companies. On the import side government took a prudent decision of increasing the import duty on gems and jewelry from 2 to 10%, thus restricting imports to some level Indian governor had a big task in his hand and had to fight on multiple fronts. One was inflation and other was rupee depreciation front which is nothing but herculean task however things are changing and we could see silver linings on the dark clouds ever since modi government came to power the leader who has an economic vision will change India’s picture if  he delivers and what has been told but without better governance nothing can be achieved. Having said that even 7% growth would mean a lot to India when global economy is slowing down. Fastest growing country in the world china came down to 7.1% India will have an edge over the other emerging economies.

       India even has a capacity to grow by 8%. If we had followed best practices and displayed the highest standard of good governance, the economy however showed signs of rival as GDP clocked 5.7% growth in April-June period of current fiscal, highest in the past 10 quarters a recent world bank report projects India’s economy to expand by 5.6%this fiscal as reforms gain momentum and the growth is expected to accelerate as proposed measures such as goods and services tax provide a boost to manufacturing sector the small measures taken so far have at least focused on some big problems one cause of slowdown was a sudden drop in investment, as big projects, such as power plants and roads got snarled up in bureaucracy but modi government has cracked heads. Tales of civil servants working late have become commonplace many permits now can be obtained online. By the start of September government has approved 175 stalled projects. Meanwhile small changes at the central level have helped curb blight inflation as it rose, and as we have stable government new stability should help growth to pick up, from 5.5 to 6.5% as well, the recovery would be quicker and even happily many weal balance-sheet have taken advantage of the rising stock market to raise equity. If reserve bank of India to ease rates towards the end of this year, if inflation eases further would help India to grow at higher rate, India is one of the most diversified emerging markets which provides foreign investor enough opportunities to rotate investment within the country. The solution to India’s fiscal problem is to expand the tax net, A proposed direct-tax code and GST should achieve. With more revenue, the state can build more infrastructure, the experiment over the past getting private sector to do heavy lifting had mixed results. The GST also helps India a single market by replacing myriad local levies. The bureaucracy need to be reformed, it will require nothing less than a complete change in outlook for a country that has forgotten how to do business. Its easier said than done but even if we try to reach nearby to bring in the reform even 8 and also far reaching 9% growth can be achieved. But unless the government does its part by adopting more radical reforms, the 9% annual growth that India enjoyed before the financial crisis would be a distant dream.