The Economic Slowdown in India

News that the Indian economy continues to slow down presents a useful case study in both globalisation and development economics. The effects of the financial crisis have begun to bite and the pillars on which its high GDP growth rate was built have faltered. Exports to the US and Eurozone have fallen sharply, alongside capital inflows, with the government looking to develop new markets in Asia and the Middle East.

A high rate of domestic inflation caused by the rise in food prices and a fall in the value of the Indian Rupee has seen consumer spending fall. The country recently saw a spate of strikes about the price of onions- the staple of its cuisine. Over 400 million Indians continue to live on less than US$1 per day, despite seeing rising living standards more or less country wide since liberalisation of the economy began in 1991 and an average growth rate in excess of 7% per annum.

India needs growth for another reason. The world can expect an estimated 184m graduates from China and India over the next decade, with 70% of India’s population now educated to at least primary level. 10 million young people a year are being added to the country’s labour market with many of the best qualified College students- including those from HR College of Commerce and Economics in Mumbai- applying to UK, US and Australian universities. Infant mortality is falling and life expectancy has reached 66 for women and 63 for men. As growth slows, India can expect greater structural debt problems going forward as welfare payments begin to rise and with further internal migration from the poorer states of Bihar and Uttah Pradesh to the big cities. Mumbai alone currently collects 40% of India’s total tax receipts.

A banking crisis remains possible as the economy slows and firms find it harder to keep up debt repayments. This is a corporate debt problem rather than a consumer one: only 35% of people have a bank account and 2% a credit card (though India leads the world in credit using Smart phone technology).

The government started a programme of QE in January and recently allowed the purchase of government bonds by foreign companies. Fuel tax rises should help reduce the rising government debt (68% of GDP) and it is hoped this will be followed be legislation to help boost FDI. This is coupled with programmes at both state and national level to develop infrastructure- anyone in doubt should check out Sea Link- a toll road built off the coast of Mumbai (a short history of Mumbai's infrastructure and background to the bridge). Attempts are also being made to cut corruption, led by popular hunger striker Baba Ramdev.

So far the credit rating agencies have been kind to India and, with a mighty population to boost domestic demand and a strong work ethic, much remains possible.

Some useful video resources:

BBC: Poor weather raises Indian food prices (also good for food subsidies) and India in spotlight as economic growth slows