NEW DELHI – Just a couple of years back, India was one of the fastest growing economies in the world and many analysts even argued that it had better prospects than the People’s Republic of China. However, lately, the political crisis and economic slowdown actually hinders the projection of a bright future. The economic growth forecast dropped from 7% to just above 5.5%, and although the figure does not seem to be that bad, it is just not sufficient. The population is rapidly growing and every year around 13 million job places need to be created, which is quite unlikely to happen considering the wide range of problems the Indian people face.
Firstly, the declining private sector investment led to problems with the major economic driver – consumption. The budget numbers were proven imprecise and the deficit has risen above the projections. Therefore, the Central Bank raised interest rates, which is driving inflation higher. Substantial interest rates damage further Foreign Direct Investment, which has already been affected by the Euro Zone problems and the economic problems in the United States. Labour laws are harsh and salaries are the same price as in China. However, in the communist state, there have already been such investments for a longer time. Moreover, laws make it very hard to buy land, infrastructure is in a terrible state and corruption scandals erode investors’ confidence.
On the other hand, elections are in 2014 and if the new Finance Minister, P. Chidambaram, sets the reforms he promised, investors and consumers will feel the economic effects by the time elections come around. He promised that major constraints on the economy will be diminished and the country is going to return to its biggest economic growth period. Although, it sounds like a typical political statement, Chidambaram has proven to be one of the most successful Indian finance ministers of all time.
Nevertheless, the condition of the Indian economy is raising doubts to whether it would be a profitable investment by foreign investors. The current financial condition of the country is rather poor and this, in addition to rise in inflation, has resulted in two main issues – reduction in the standard of living of the people and an increase in the gap between rich and poor. Though an economical problem, it is having huge political repercussions and the people’s faith in the government withering every day. Whether the country be able to sort out its problems and tread the path of growth will remain to be seen.
Image Courtesy: Partha Sarathi Sahana (http://www.flickr.com/photos/22853208@N05/5291392624/sizes/o/in/photostream/)span>