The year just gone by hasn't been great for India, economically. The Government obviously gets blamed when things go wrong, and it did go horribly wrong last year. That is par for the course, because the Government is quick to accept credit when the economy does well.
Though, it is easy to blame the Government for the mess the economy is in, the fact is that our economy runs on auto pilot and is not very dependent on Government initiatives. Services constitute 55-60% of the GDP and this sector is by and large independant of Government interventions. Inflation was in double digit throughout the year, but this normally should be good news for the Corporate Sector, as in the short term, inflation means addtional revenue.
So why did the economy become sluggish. Global economic situation is very bad. USA is in trouble, as the sins of 2007 are fast catching up. Eurozone is in a melt down. Japan is still recovering from the Tsunami and Earthquake, and even Chinese economy is splitting at seams. There is hardly any demand for our products and services, and with internal consumption sluggish, due to higher interest rates and inflation, and with Government not willing to make any bold (or even routine) initiatives, the Corporates lost confidence. The current crisis is more of crisis of confidence than a crisis of economics.
The Government can think of stimulus to increase the demand. Allowing the Rupee to devalue by not intervening is one option. This would make Indian goods and services cheaper, boosting demand. Agreed imports will become dearer, but that can be compensated by supporting CAPEX importers with soft loans. Investment in the Agricultural sector will have a direct impact on stimulating the local demand. Sector specific easing of loans can be made available to select manufacturing sectors, that are critical to the growth. While it is tempting to suggest reduction of interest rates, one has to keep in mind its impact on inflation. But since an increase in interest rates did not contain inflation, one really wonders whether a decrease in interest rates will have a negative impact on inflation. One has to wait and see.
In short, have confidence in our Corporates and people, show that you are taking meaningful actions in a calibrated way, and you will have the economy up and running again.
This is assuming that the economy was performing purely due to internal competencies in the past. I had always suspected that the black money pouring in through the Mauritius route as FII was more responsible for Indian economy doing well in the past, than because of strong fundamentals.
