Dimitris Rapidis

Why is India slowing down?

India is one the major parts of the BRICS group. Major in terms of GDP growth, development rate, per capita growth and technological assets. But India is also one of the most fragile economies of the BRICS as well. It does not escape the deceleration of the emerging giants (i.e. China, Russia, Brazil) mainly due to the low consumption rate in comparison with investment rate, but India faces an additional risk: that of capital flight.

During last semester, India has been faced with strong anomalies in its current account balance similar to the crisis that was spurred up in 1991 when the country was at the brink of bankruptcy and the government decided to transfer gold to the Bank of England in order to ensure a bailout loan. But how this shift came up to India, the third biggest economy of Asia?

It is certain that India is not the only emerging market being encountered with such a critical situation. The US Federal Bank has already announced last May that it will reduce the program of buying state bonds in monthly basis, in an effort to control spending, a fact that has inevitably imposed pressure over investors. The squeezing of state bonds availability and appeal is inextricably interwoven with the development of the Indian economy as the money crossing the country are destined to growth plans. Therefore, the reducing trust of the US Fed over New Delhi has ended up in massive capital flight, leading to the downfall of the Indian rupee over other currencies from 5% up to 15% overall.

From a wider perspective, the Indian economy is already counting for two years facing recession. Growth rate is lower about 4-5% comparing to the medium standard rate during the period 2003-2009, whereas consumption rate is always kept down to 10% -i.e. a percentage that is incomparably lower to what growth and investment rate have brought in economic development. In addition, complex bureaucratic procedures impede the tracking of big industrial plans and, further, the forthcoming elections on May are also putting some additional leverage on this debate about economic stability in the country.

Another factor that increases uncertainty is that the Indian economy is heavily dependent to foreign capitals. The deficit on current account was rocketed at 7% in early 2013, yet expectations for consolidation are growing. And this because India possess a great investment potential and the ratio of debt liability over GDP is controlled. Nonetheless,, and this is one of the fundamental problems, India is not consuming. From smartphones and real estate to daily nourishing.

Therefore, it is all about shifting the orientation of the economy. Now it is time for India to start spending in order to revitalize its economy and start lessening foreign dependence.

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