What ails the Indian economy?

We may take solace by blaming the international developments for the mess that we have created around the growth prospects of Indian economy. The commonwealth games scam, about a year and a half ago, that laid the foundation of a policy paralysis in governance, has spread its tentacles too far and way  beyond the imagination of most analysts who were banking on the 'India shining' theory. We may take pride in the fact that we still continue to grow at 5.8% annually as compared to the widespread recession in the Euro zone. But the fact remains that we have not grown to our full potential. The average Indian has become too pessimistic about the economy, thanks to the lack of governance, and this is telling on the GDP growth. The major factors contributing to the gloomy scenario are discussed here-under:

• Over reliance on 'foreign money': Indian economy has achieved sustainable growth in the past on the back of the high savings and investment rate by the households. The savings and investment has suffered due to the cautious approach of the Govt. and lack of enough incentives to promote 'investment skills'. Most Indians still invest a bulk of their investments in unproductive assets such as physical gold and real estate. This not only hampers the availability of funds for growth but is also a big deterrent in curbing the menace of black money. The govt. on its part has not given enough incentives to the local population to encourage investment in growth avenues. As a result of this many development projects are suffering from lack of capital. Secondly, the companies that raised overseas funds to fund their growth have hit a debt trap with the depreciation of the Indian rupee.
• Irresponsible politics: The ruling party, its allies as well as the major opposition party have been at loggerheads with one another. Their irresponsible behaviour is responsible for the ongoing policy paralysis. The so called 'Civil society' movement has also played havoc with the economic decisions, as their members are now indulging in cheap gimmicks to attract public interest. These people must remember that power without responsibility is even worse than the corruption issues that they are highlighting. The decision making process of the govt. has been virtually suspended due to illogical threats by the alliance partners. An example: The inability of the Govt. to raise diesel/ cooking gas prices has lead to a distortion in fuel prices, with petrol and diesel price differential leading to confusion all around. Infrastructure, Power and aviation sectors are bleeding due the indecision by the govt.
• Inability to curb 'Food inflation': Govt.'s inability to curb food inflation has created a situation that is keeping the interest rates high and putting undue pressure on the Indian Rupee. Adequate steps are not being taken to overcome supply side bottlenecks, on the other hand raising of MSP for crops is fuelling food inflation. Most of the benefits, such as fertiliser/ seed subsidy, intended from small farmers are actually being used by middlemen.

The only saving grace for the GDP growth of Indian economy has been the services sector which continues to grow at a double digit level. With industrial production dipping into negative territory for March '12 and agriculture sector stagnating in the 2-3% range, it will be extremely difficult to achieve a growth rate of 8-9% in GDP numbers. The Govt. needs to encourage investment by Indian citizens rather than waiting for foreign investors to lead the revival.

Bad phase for Risk investment: The bad phase for risk investments is likely to continue a little bit longer. While international commodity markets have cracked, equity and real estate markets ate still holding on. Any negative cycle in global markets is not completed till real estate prices correct substantially. Investors can look forward to a substantial correction in real estate market as supply-demand distortions reach dis-proportionate levels. Equity markets could make the final bottom thereafter. this entire cycle is likely to be completed in the next 4-6 months, thereafter it will be a smooth ride for equity markets. This could well be the final phase of the downturn which would lay the foundation of the next bull run in equity markets.