## India’s Slowdown May Have a Silver Lining

_IMF Blog, May 24, 2012_

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## Bibliographic details
- Authors: Roberto Guimares, Laura Papi
- Published: May 24, 2012

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### Recent slowdown: facts and near-term projection
- Authors and date: Roberto Guimarães, Laura Papi; May 24, 2012.
- Context: Global financial crisis of 2008-2009 and ongoing international financial market volatility, high and volatile oil prices, and the uneven global recovery.
- GDP growth dynamics:
  - GDP growth fell throughout 2011, from a high of 7.8 percent at the beginning of the year to 6.1 percent in the quarter ending in December.
  - The slowdown in the economy has affected the industrial sector particularly hard and extended to 2012 as shown by the 3.5 percent contraction (y/y) in March industrial production.
  - IMF projection for 2012/13: GDP growth is likely to be about 7 percent.
- Perception: By international standards 7 percent growth is still very robust, but it contrasts with rates above 9 percent a few years earlier.

### Investment: magnitude, drivers, and long-term implications
- Magnitude and pattern:
  - Investment reached 38 percent of GDP in 2007/08, just before the onset of the global financial crisis, lifting growth to nearly 10 percent.
  - Investment growth subsequently dropped sharply, crossing into negative territory for the last two quarters of 2011.
  - This downturn is unprecedented: with the exception of the September-December quarter of 2008, one would have to go back to the last quarter of 2001 to find a year in which investment fell. Since quarterly national accounts have been compiled, no consecutive declines in investment were recorded until 2011.
- Drivers:
  - Weakness in investment has been mainly due to domestic factors, such as high and volatile inflation, but not real interest rates.
  - Macro variables alone cannot fully explain the weakness; structural factors affecting the business environment were also at play.
- Long-term implications:
  - Investment is a component of aggregate demand; its decline must be offset elsewhere to maintain a given growth rate.
  - Lower investment translates into lower productive capacity and lower average growth over time.
  - Rule of thumb cited: a one percent of GDP decline in investment could lower trend growth by about 0.3 percent.
  - The decline of share of investment in GDP by 3.7 percentage points since the global financial crisis could lower trend growth by slightly more than one percentage point.
  - Long-run income effect: income per capita would be nearly US$1,000 lower in 20 years (more than 50 percent of today’s income per capita) if the economy were to settle at a growth rate of 7 percent instead of 8 percent.

### Supply constraints and structural bottlenecks
- Binding constraints and consequences:
  - Supply constraints particular in power, mining and land have become increasingly binding.
  - These constraints have raised costs and inflation, damaging investor sentiment.
- Structural reforms and areas of focus:
  - Streamlining taxation through the Goods and Services Tax (GST).
  - Facilitating business investment via additional financial reforms, especially for the corporate bond market.
  - Facilitating trade and easing labor regulations to boost productivity and job creation.
  - Education improvements to raise skills and employability.
  - Fiscal consolidation and reforms to increase resiliency and make growth more inclusive.
  - Reducing inflation in a durable way as the best contribution the Reserve Bank of India (RBI) could make to rapid and sustainable growth.

### Policy steps, recent measures, and the potential silver lining
- Immediate government actions to boost investor sentiment:
  - Accelerate the pace of project approvals.
  - Launch high-impact reform initiatives such as rationalizing fuel subsidies and further liberalization of foreign direct investment rules.
- Priority sectors and measures:
  - Addressing problems in the power and coal sector as an immediate priority due to cross-sectoral linkages.
  - Latest budget measures begin this process with some financial reforms, measures to broaden the use of public-private partnerships (PPPs), and an enhanced role for UDIs (unique identification numbers) in targeting government programs to improve spending efficiency.
- Financial sector and monetary policy actions:
  - The RBI has continued to implement financial reforms to facilitate infrastructure financing, improve the transmission of monetary policy, and promote financial inclusion.
- Outlook:
  - If positive signs are quickly followed by bolder government action, the recent slowdown could have a silver lining by catalyzing reforms and restoring investor sentiment.

*Source: India’s Slowdown May Have a Silver Lining, Roberto Guimarães and Laura Papi, May 24, 2012.*

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## References

- [slowdown](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR041712A.htm)
- [project that GDP growth](http://www.imf.org/external/pubs/cat/longres.aspx?sk=25867.0)
- [worldwide slowdown](http://www.imf.org/external/pubs/ft/survey/so/2012/RES041712A.htm)
- [causes](http://www.imf.org/external/pubs/cat/longres.aspx?sk=25762.0)

_Source: https://www.imf.org/en/blogs/articles/2012/05/24/indias-slowdown-may-have-a-silver-lining_