For the fiscal year ending March 31, growth was 5%, down from 6.2% the previous year.
Economic growth has been slowing for nearly three years.
India has massive potential, and in the early part of the century was identified by Goldman's Jim O'Neil as one of the BRICs. So what explains the persistently mediocre performance? At the moment there are certain cyclical issues, but big picture, the country suffers from corruption, horrible infrastructure, and protectionism.
On the cyclical front we have problems like declining consumer confidence, declining industrial output, poor monsoons, and weakness in the rupee.
"Supply and policy obstacles have seen growth decelerate and investment and industrial output slump, with the stasis compounded by weak global demand," said ADB Chief Economist Changyong Rhee in an April report. "Policymakers need to remove structural hurdles to faster growth, and while there have been some encouraging recent reforms, more is needed."
Let's look at some of the deeper rooted issues like the nation's current account deficit woes, slow pace of economic reforms, and decline in investment because of corruption.
The Current Account Deficit Problem
Current account deficit (when the value of imports exceeds that of exports) fears have been central to India's economic slump.
The current account deficit reached a record high of 6.7% of GDP in the last quarter and has been blamed for weakening the Indian rupee. Remember, India isn't a heavily export dependent nation — exports account for about 25% of GDP in India, compared with about 31% in China.
And India is also struggling to curb its fiscal deficit. "While there was justification for running a high fiscal deficit for a short period of a year or so after the credit crisis to support confidence in growth, continuing with it for four consecutive years has hurt the economy," write Morgan Stanley analysts Chetan Ahya and Upasana Chacra.
In May, the government finally gave markets what they wanted. It announced that foreign institutional investors (FIIs) and qualified foreign investors (QFIs) would be subject to a withholding rate of 5%, down from 20% on income from government and corporate bonds, from June 1 to May 31, 2015.
But India is still considered very protectionist. The back-and-forth on allowing 51% foreign direct investment in multi-brand retail that impacts retailers like Walmart is probably the most well known. That had an unhappy resolution with the central government approving the measure but putting the onus on state governments by allowing them to decide whether they would let foreign retailers set up shop.
More recently, pharma giant Pfizer criticized India for its "protectionist intellectual property regime" to the U.S. House Committee, according to the Financial Times. At the same hearing, a lobby of U.S. tech companies criticized India for its “preferential market access policy.
The DTC Bill would replace the existing income tax act to include many companies and individuals that slipped through the tax net before.
The Land Acquisition Bill, one of the more controversial ones, aims to classify the manner in which the government can obtain land from farmers for infrastructure projects.
india stalled projects chart
Citi
Protests over seized land have caused many projects to be stalled. And analysts say that getting these projects back on track, and getting new projects in the pipeline, are key to driving growth.
The Mines and Minerals (Development and Regulation) Bill is another important economic reform. The most controversial clause in the bill requires miners to share their profits with the community that is affected by their work, according to the The Statesman. Coal miners would be required to share 26% of their profits.
Major corruption and poor infrastructure
India's mining sector is the perfect example of the kind of corruption that India has to crackdown on if it hopes to draw investment, increase supply, and drive growth.
The Coalgate Scandal as it is popularly known emerged from a report by India's Comptroller and Auditor General (CAG) that accused the ruling UPA government of selling coal fields to top industrialists without using competitive bidding practices, and giving them "undue benefits." The CAG claimed this cost the government billions of dollars in revenue.
India ranked 94 on Transparency International's 2012 Corruption Perceptions Index. This was below three of its BRICs counterparts, Brazil, China, and South Africa. Only Russia ranked lower at 133. Rampant corruption has been a major deterrent to foreign companies looking to invest in India.
india problem doing business chart
World Economic Forum
The nation's infrastructure problems act as another huge deterrent.
"Inadequate supply of infrastructure," "corruption," and "inefficient government bureaucracy," were cited as the top three most problematic factors for doing business.
Some 600 million people were left without power last year. And corruption has largely contributed to the power shortages. A report from the Herald Net at the time pointed out that "transmission and distribution losses in some states are as much as 50 percent because of theft and corruption by employees in the power industry."
In fact, India has missed every annual target to increase electricity production capacity since 1951, according to a Bloomberg report. The country has seen the gap between demand and supply of power jump to 10.2 percent in March this year, from 7.7 percent in March 2011, according to The New York Times.
The economy is bottoming out but elections still stand in the way
The one silver lining is that experts think the economy is bottoming out.
Morgan Stanley analysts Chetan Ahya and Upasana Chacra argue that the decline post the financial crisis that was due to a "bad growth mix," of high fiscal deficit, strong growth in rural wages, and low investment, and that this is starting to reverse.
BAML fund manager survey
BAML
What's more? Investor sentiment on India has picked up. Bank of America's latest fund manager survey showed that investors were net 38% overweight in May, compared with 27% underweight in April.
While the government has been trying to push through reforms and review growth ahead of the 2014 general elections, some argue that the elections will be an obstacle to reviving economic growth.
"However, and despite some recent legislative successes (eg, raising administered fuel prices and easing restrictions on foreign investment in some sectors), we expect his efforts to be increasingly hindered by electoral considerations from here on," says Nomura's Alastair Newton.
With India set to account for one fifth of the world's working age population, the country's burgeoning youth can only hope that its leaders get serious about reviving and reforming the economy.
