India has been growing at a blistering pace over the last few years. Strong policy framework and buoyant macroeconomic environment has ensured India a top place amongst the fastest growing economies of the world. As the consumption boom matured, people even started asserting that double digit growth was on the radar over the years to come.
However, the planning commission has advised a word of caution against the prevailing optimism. Not only does it feel that double digit growth targets are ambitious in nature but also highlights the fact that achieving a sub-9 percent kind of a growth is a challenging task as well.
Although the consumption theme is getting ripe day by day due to better employment opportunities and higher standards of living, it needs to be understood that growth is also dependent on various other factors. Investment, government expenditure and exports are other important factors that drive economic growth.
Considering the inflationary pressures, rate tightening is likely to persist for a few more quarters. And since rising rates are a deterrent to industrial capital expenditure, we believe that the investment cycle would take a backseat for a moment.
This is likely to hurt growth in the near term. Infrastructure is another area where India needs to focus a lot. Rapid investments in infrastructure through sound policy framework can lead to higher growth in future.
Even the government expenditure on key sectors such as health care and social welfare is constrained due to funding issues thereby impacting growth. More often than not the government has to expand its borrowing limits to fund national expenditure.
However, India is doing well on the exports front. Significant labour cost arbitrage and knowledge capital has led to increase in exports augmenting the growth prospects.
Thus, if one looks at the overall factors that drive the growth of an economy in general it can be said that exports and consumption are driving the Indian growth story at the moment. However, investments and government expenditure are the areas where further improvement is required.
In fact, we believe these two factors are a differentiating line between China and India at the moment. While slowdown in investments is a cyclical phenomenon (dependent on rate cycle) bureaucratic impediments restricting investments in infrastructure is a structural concern.
And this concern can be resolved only through political will. Once that happens, perhaps, double digit growth can indeed become a reality in the years to come.
First Published: 9/6/2011 2:30:41 PM