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End of the India story

June 16, 2008

Abstract: The contemporary narrative is that the India growth story is real and here to stay. Growth acceleration since 2003 is a product of structural shift brought about by economic reforms. Unfortunately, this rosy picture is belied recently by inflation, fiscal situation, FDI reversals, and depreciation of the rupee. What is the cause for this unravelling? Is it a typical business cycle aggravated by supply conditions?

The India story is more about steady growth, and steady domestic consumption and spending and not so much about cycles. The lack of a ‘facilitating environment’ viz distortions in inputs and product pricing, over-dependence on subsidies, inadequate public investment in rural areas, lack of farm to consumer linkages and resistance to organized retail are some of the factors which are proving detrimental to sustainable rapid growth. Incentives and efficiency constitute the cornerstone. For this, India has to be in a constant state of reforms.

Keywords: structural shift; policy reform; inflation; fiscal situation; FDI; depreciation; business cycle; macroeconomic management; mispricing; subsidies; consumer linkages; organized retail; efficiency; skilled labour supply

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