Interestingly as per an IMF report, name World Economy Outlook published in April 2013, the Indian GDP for the financial year 2012 was $1.8 trillion and was expected to be $1.9 trillion for the financial year ended 2013-2014.
Therefore from that perspective the Indian economy has not risen to $ 1.7 trillion but has actually shrunk in dollar terms from $1.8 trillion to $1.7 trillion at a time when it should have been ideally been $1.9 trillion. In terms of rupees, surely the value of the Indian economy has grown up to Rs 105.39 Lakh Crore from Rs 93.88 Lakh Crore in 2012-2013 (Read here).
The economy has not risen to $1.7 trillion but has shrunk from $1.8 trillion
Yet the shrinking in the dollar term is primarily because of major devaluation of the rupee over the last one year. From around the level of below 55, the rupee had a major fall to 68 to a dollar before having a substantial recovery to around 62 now.
The considerable depreciation, which was predominantly because of a massive surge in Current Account Deficit (CAD), has to a certain extent arrested but other major concerns, which too have been responsible for the falling trust in rupee, do remain.
Therefore apparently even though in rupee terms the Indian economy has gone up, it has not benefitted the economy and on the contrary, a falling value of rupee increases the cost of imports thereby increasing the cost of literally everything, which has a substantial import component, even when that product is manufactured in India. Such increase in costs, including that of the import bills of fuel and gold in addition to a host of other things, eventually result in inflation.
While a certain proportion of the CAD was also due to incredibly high level of gold import, one cannot deny that policy paralysis, policy indecisiveness, lack of institutional clarity, issues of corruption, massive delays in clearance of projects and tax feud, each of these did play a role in making India's growth story a sad saga where even increase in the GDP in terms of rupee does not end up in helping the nation at large.
Meanwhile efforts to contain inflation have always been with respect to tampering with the interest rate with the presumption that higher interest rate would induce more deposit and reduce expenditure thereby controlling inflation. For the last few years it has been proved that India's primary inflation is because of food prices and not because of organised industry.
Therefore unless reforms are brought in the agriculture sector, India's issues of stubborn inflation will not go away. The supply side constraints created by inefficiencies in the supply chain of agricultural products with middlemen making huge profit at the cost of both the producer of agricultural products and end consumers, is hurting the economy a lot.
In addition to this, the investment climate has to be improved with a clear cut policy directive. One has to give some credit to the Finance Ministry and RBI for containing the CAD and bringing it down to manageable levels, yet the problems of India will not be solved by that alone. If policy directives are one thing that is needed to be worked upon, the other key issue invariably is that of subsidy. India's gargantuan subsidies and populist policies, be it highly subsidized fuel oils, be it subsidy in fertilisers or be it the food security bill or employment guarantee scheme, each of these revenue expenditures essentially has become a drag on the economy with no sustainable asset development to compliment the money being spent.
In a recent interview to CNN IBN, former Secretary General of United Nations Kofi Annan rightly stated that subsidies once granted become difficult to end and that a situation should not be created where people do no value it (subsidies). India's situation today is essentially like that.
It is well nigh impossible for any nation with a billion plus population to continue subsidising everyone and presume the economy would continue to thrive and would not be dragged down. One has to remember that it is this kind of a populist subsidy regime which was one among many reasons that eventually led to India's financial collapse in early nineties.
Whoever forms the next government at the centre would have to take some hard decisions to not just create an enabling environment for business to prosper and create employment, but also would have to take some extremely unpopular decisions to cut subsidies and destroy the myth that the government is a provider of everything and would continue to provide everything.
The impact of that would take time to percolate down but eventually it would help more than just recovering the economy. More than anything else India needs to do some real repair work of the damages to the very foundation of the Indian economy.