While there may have been some effect of the current global slowdown on economic activity in India, poor

performance of agriculture has perhaps been more responsible for the Indian economic slowdown in recent years. Thus domestic factors such as agricultural growth can be neglected only at our own peril. With the information technology industry set to be a major vehicle for productivity growth, India must be prepared to withstand the increased possibility of output volatility through upswings and recessions. And as it increasingly meshes with the globalised trading and financial system, India's own financial system must be strengthened to withstand asset price shocks with policies geared to take quick remedial measures.

The Indian economy is gripped by crisis:

GDP growth has slowed to below trend, Industrial production has decelerated sharply alongside lacklustre investment, Twin deficits remain chronic, and Inflationary pressures persist.

Investor confidence has also waned amid growing political uncertainty, and is reflected in the decline of the rupee and the stock market. Since the beginning of 2011, the rupee has declined by 25% against the dollar. It is the worst-performing currency in Asia exJapan, despite recent government efforts to halt its slide by raising the ceiling on foreign investment in rupee-denominated debt. Indias economic woes appear reminiscent of the crisis in 1991 when the country, facing bankruptcy, was forced to airlift its gold reserves abroad to secure emergency IMF loans. A stagflation-type environment is emerging in India. GDP growth has slowed sharply to 6.5% in the fiscal year ending March 2012, from 8.5% in the previous year. Inflationary pressures remain persistent despite the Reserve Bank of India (RBI) hiking the repo rate 13 times by a cumulative 375 basis points since March 2010. Although the latest figures show headline inflation to have eased to 6%-7% in July 2012 from the highs of 9%-10% over the last two years, the moderation was mainly on account of the cooling in food and fuel prices. Inflation is still significantly above the RBIs comfort zone of 5%-6% and underlying inflationary pressures remain strong the RBI has recently warned that inflation risks remain high in the short term owing to suppressed administered fuel prices as well as infrastructural bottlenecks in coal, minerals and power (Reserve Bank of India 2012). Poor monsoon conditions are also likely to have an adverse impact on food prices and, as a consequence, wages. Indias deteriorating growth-inflation trade off underlines the macroeconomic imbalances and structural weaknesses of the economy. First, the twin deficits create a level of vulnerability for India that is a cause for concern. Indias expansionary fiscal policy, intended to fight the 2008 global credit crisis, has led to a dramatic deterioration in the countrys fiscal situation. Government spending in the form of several social programmes (particularly the National Rural Employment

Guarantee Program or NGERA, which gives 100 days of minimum wages to the rural unemployed) to boost domestic demand has strained the governments budget position, causing the overall fiscal deficit to widen from 4% in FY2007-2008 to 7% in FY20112012 (Figure 1). With sluggish economic growth and the consequent loss in tax revenues, the risks of fiscal slippage are high. The fiscal outlook has also become more tenuous since it will be difficult to rationalise subsidies if food inflation were to accelerate sharply in response to a poor monsoon. Fiscal imbalances pose risks to macroeconomic stability and undermine growth (IMF 2011) a persistently high fiscal deficit will raise interest rates for the private sector and constrain the governments ability to implement any stimulus measures to prop up the economy when growth slows, as is happening now. Figure 1. Fiscal revenue, expenditure and deficit

Source: Ministry of Finance, CEIC

While the approach of stimulating domestic demand via fiscal expansion in 2008 put Indias economy back on track after the global financial crisis, the inertia in withdrawing stimulus has subsequently led to a spike in inflation that prompted monetary policy tightening and dampened aggregate demand. Gross investment (especially private) and savings slowed as a result. Total savings declined from the peak of 36.8% in FY20072008 to 32.3% in FY2010-2011, a decline of 4.5% of GDP, which exceeded the fall in

gross investment of 3% of GDP during the same period. Reflecting the widening gap between savings and investment, Indias current-account deficit increased in the postcredit crisis period (Figure 2). The decline in total savings, a large part of which stemmed mainly from the erosion in public savings due to falling government revenues, has pushed the current-account deficit to the highest level since the 1991 balance of payments crisis. During the 12 months ending March 2012, India had a current-account deficit of $78.2 billion or 4.2% of GDP. This diverged from the current-account deficit, which ranged from -0.5% to -2% of GDP that policy makers have been conservatively maintaining since the 1991 balance of payments crisis. Historically, India has run a current-account deficit primarily due to the policymakers pushing investments and growth higher than that supported by the domestic saving rate. After FY2008-09, however, savings have been declining at a much faster rate than investment. Figure 2. Current and capital account

Source: CEIC

A widening current-account deficit could potentially lead to pressures on the countrys balance of payments and the currency. Although Indias current-account deficit has been offset by capital account surpluses, nearly three-quarters of the deficit for the past four years was estimated to be financed by more volatile sources of capital, including commercial loans, trade credit and portfolio equity and debt inflows (Figure 3). Net foreign direct investment (FDI) inflows, which plunged 58% to $3.83 billion in the first three months (April-June) of FY2012-13, run the risk of slowing further due to regulatory uncertainty and corruption-related scandals. The inability of the government to push ahead with the liberalisation of FDI limits in the multi-brand retail sector as well as the

imposition of retroactive tax on foreign mergers have discouraged foreign investor interest and worsened business sentiment. Figure 3. Net capital inflows

Source: CEIC

To compound these domestic challenges, the external environment has not been supportive. Weak external demand has weighed on Indias exports, and despite the recent currency depreciation, the countrys current-account deficit woes are not expected to diminish. According to a JP Morgan study, Indias exports are far more responsive to changes in external demand than to movements in the exchange rate (JP Morgan 2012). In addition, the inelastic nature of Indias imports, particularly oil, is likely to exert pressures on the current account. Considering Indias high current-account deficit, the risk of slowdown in capital inflows will exacerbate the funding risks and currency depreciation pressures. Indias rising current-account deficit raises serious questions about its sustainability, particularly against the backdrop of volatile global conditions and volatile capital flows. The RBI recently carried out an analysis showing that with GDP growth of 7% a current-account deficit-GDP ratio of around 2.5% is sustainable (Reserve Bank of India 2012). With Indias current-account deficit already exceeding this threshold level, its external vulnerability is expected to rise further. Further, Indias short-term external debt has increased with the recent depreciation of the rupee, raising the countrys exposure to external funding stresses and giving rise to concerns of a high debt service burden. At the end of March 2012, the ratio of short-

term debt to total debt stood at 22.6% compared to 10.2% in FY1990-1991. High external debt, along with a deterioration of the net international investment position since the global financial crisis, has made the country more susceptible to external shocks. However, Indias foreign exchange (Forex) reserves are now considerably larger compared to 1991, with the ratio of Forex reserves to total debt standing at 85.1% versus 7% in FY1990-1991 (Ministry of Finance 2011). Indias ample foreign reserves provide some buffer against balance of payments pressures, with Forex reserves providing almost 100% cover to Indias external debt, or 7.1 months of imports (Figure 4). Figure 4. External debt and reserves

Source: CEIC

Despite the weakening of growth momentum, inflationary pressures have persisted, driven by high commodity prices as well as structural demand and supply imbalances. Higher demand due to shifting dietary patterns and rising household incomes have led to higher food prices, which are further exacerbated by low agriculture production growth that has averaged less than 2% per annum in the past decade. In the near term, inflation will remain elevated due to the upward adjustments in energy prices as well as increases in minimum support prices for various crops. Inflation expectations are also expected to remain sticky, creating not merely upside risks to near-term inflation but also likely to lead to a surge in gold imports (which was a key factor worsening the current-account deficit over the last two years) to hedge against inflationary pressures.

The persistent fiscal deficit and the declining rupee pose potential threats for further inflationary pressures.

Conclusions
Indias current economic slowdown reflects both cyclical and structural factors. A slowdown in the investment cycle, combined with supply constraints and a subdued external environment has caused growth to slow to below trend. With weak global demand for exports, Indias continued economic expansion will have to rely increasingly on domestic growth drivers. However, the pace of structural reforms has been slow due to political gridlock; after high-profile corruption scandals in recent years (notably the mis-selling of telecommunications licences in 2008), many key economic reforms have stalled as a result of slower government decision making. Further, in terms of policy response, the government faces a dilemma whereby high inflation have complicated the RBIs management of the rupee while the twin deficits significantly limit the monetary space for more aggressive countercyclical policy measures. If India persists with a lack of reforms to rectify the macroeconomic imbalances, it could inhibit the country's growth potential. The IMF has estimated Indias potential growth rate at a much higher 7-8% (IMF 2010), and underpinning optimism over the countrys medium-term growth prospects are favourable demographics and significant progress towards economic liberalisation since the late 1980s. To realise Indias growth potential, major structural reforms aimed at improving the investment climate are necessary. In particular, legislative initiatives concerning land acquisition and mining, tax and financial sector reform as well as FDI in multi-brand retail, are important for ensuring the sustainability of its high growth. To mitigate supply constraints and facilitate non-inflationary growth, speeding up reforms in the power sector is an urgent priority, particularly through better allocation of domestic coal via pricing and reform of electricity tariffs (IMF 2012). Given recent important personnel changes in the finance ministry, it remains to be seen if the government will finally bite the bullet on a host of long-awaited policy measures, thus delivering the crucial structural reforms needed to restore confidence.

The deteriorating economic growth of our nation could just be noted to be believed. It was 8 % in the first quarter, 6.3 % in the 2nd, 6.1 % in 3rd and in the 4rth quarters, it was 5.3 %!!! This is called not a slump in economic growth but a crumbling down of economic growth. This article has some suggestions to be put forward to the government to bring the economic slump back to its former glorious past.

In merely a year (2011-12), such a steep slide down was unseen ever before. Even the economy of Greece hadnt pulverised in such a faster pace as is evidently happening in India, the calamitous nature of which, our government is making excuses of as the part of its economic mismanagement. Its for the 2nd time round during the period of 15 years that the industrial growth of our country has gel past below zero. For the first time round in 41 years, the growth of production in the mining sector is zero. The first fall in the banks deposit rate is being witnessed in 6 years. These are all unparallel events which cant be associated with what is happening in Greece or Spain. For the lapses of the nature of political lapses, when the government runs amuck to blame international developments, then it is the right of the peoples republic of India to doubt whether team Manmohan is rally serious to extricate the nation out of the morass of economic downslide. If the restlessness for reforms on the part of the government is true, why doesnt the formula of return to the formulae by the government is being ferreted out which are gathering dust under the piles of very files, sitting upon which, the PM is playing the game of meeting- meeting. The very doors through which have entered the flood of troubles will open up the doors to rescues. No coalition component is obstructing the ways leading to these doors for the rescue and relief measures to be undertaken by the government. In order to pour a little oil and a bit of grease in the creaky and rusty economic machinery, no big arrows of reforms are required in the conch.

Pathways to return to a shiny economy

The scenarios are mind jolting. The Indian companies are sitting on the mountains of cash reserve and investment has come to a grinding halt. In the last quarterly of the last year, there was a whopping 4, 56,700 (data courtesy Economic Journal of India) crores of rupees of cash reserve with some chief private companiesalone which was in excess b 21 % in comparison to the last year. If in the investments schemes (liquid funds), the investment of companies are added up, then the height of the mountain of the cash would measure up to whopping 5, 70, 700 crores of rupees. Its but natural for the annoyance to rise up over the functioning style of government when among these companies are also the government companies which are sleeping over the cash mound of 1, 37, 576 crores of rupees (data- courtesy economic journal). Pulak Chatterjee (the principal secretary to the PM), had called this January a meeting of the public sector undertakings and asked them to invest the cash piles they were sitting over to stem the tides of economic downslides. But not a leaf shook afterwards. In the midst of shortfall of coal and electricity, the responsible coal companythe Coal India Ltd is sitting over the bank balance of 53,600 crores of rupees and doesnt seem to be interested in investing even 5000 crores of rupees. In the week just slipped by, just before two days from the PMS proposed meeting, the coal India told the ministry of power that it cant augment up the production of coal (which was far behind the scheduled target) meaning thereby that it cant supply adequate coal to the power companies. The

fresh investment reports of the Hero Moto Corps (2575 crores rupees) and Reliance (1 lac crores of rupees) reveal the fact that demand is manifolds in the market, hence investment for the companies is their business compulsion. Based on the consumers demand, the profits of non power companies in 2011-12 have increased up to an average of 15 % (Courtesy- studies of Kotak securities). Despite the worse environs, auto, pharmacy, consumer productcompanies are performing better i.e. in the reforms to be made in order to be able to get the companies to invest, there is the need of no any big plan of action but the need of a government with strong spines which could make the public sector undertakings of the likes of Coal India to augment supplying the necessary resources and provide assurances to the private companies to deploy capital.

Factors causing the economic downslides

The confidence in making investments in the economy shall return back again by not repeating the misdoings which have been going on since some years past. The first villain of growth is the government deficit. This deficit is due not to the reason of investing into the basic infra structure but due chiefly to loan waivers, MANREGA, and subsidy types of things. The aim of inclusive growth named growth did mean winning political brownie points but what the Congress got was the series of setback of electoral defeats. The vision of inclusive growth wiped the strength out of the treasury and out of the real growth. Now the slow down and the unemployment has become the political scourge for the Congress party. If the Congress is really serious, it would have to declare for the closing down of the treasury eating schemes and projects and subsidy. Investors confidence will not take much time to return back to former levels. The other hunter of the Indian growth is the imbalances in imports (the deficit of current account, fall of rupees) which have cropped up from the oil imports. The comedy is gong on the price of petrol. Petrol prices rose but the diesel price remained untouched which was eating up the subsidy the most. It again stayed undisturbed because the president of Congress would go in diesel cars to the Raisina hills. Despite being the situation so grave on the front of foreign reserves, such a politicking on the score of fuel prices is quite baffling. The heaviest blow has been thrown by the interest rate which was enhanced up to stem the rise of inflation. Conclusion: There still are hopes left. The falling prices of oil in the international market, to a degree of shortfall in the quantum of imports of gold, invest plan of government in Europe, better agriculture harvest in the country, cash availability with the companies, and the realization of the reality to the government all these are silver limning in the dark clouds. If we need a crisis to reform ourselves, that also is looming large over our head. India has got this years time only the first quarter of which has already gone down by now. The forthcoming 9 months would tell whether the government has saved us or doomed us. The reverse count down for the Indian economyhas just begun.