India's economic slowdown: How to keep it at 7-8%
Proximate causes for the slowdown are on the demand side. For several quarters now, growth in private consumption, the biggest component of GDP, has been sluggish. Private investment, the most important driver of GDP, hasn't taken off. Exports have done reasonably well, but are unlikely to be a major engine given the global context of slowdown and trade aversion in the advanced economies. Essentially, the economy was being driven by public investment, which has been pared back a little in the interest of fiscal consolidation. Was that a mistake? No.
The public investment-led strategy has been in place for a few years now. It became the prime driver of growth when the banking and corporate sectors were under stress after a period of excess in the late 2000s-early 2010s. Banks needed time to reduce NPAs. Corporate balance sheets had to be deleveraged. That process is complete. The 'shock' effects of Covid and outbreak of the Russia-Ukraine war have also abated.
Ultimately, public investment should crowd in private investment. For that, government spending/borrowing must come down to free resources at an affordable rate to the private sector. In any case, given that India is a market economy, it can't depend on the government fuelling growth for any great length of time.
Why is the private sector not responding? One explanation lies in the interest rate. Monetary policy is too tight. Cost of capital is high for individuals and firms. By keeping the repo rate unchanged, RBI is signalling concern about inflation,
