India's economic miracle was a mirage

Concern over India's faltering economy is spreading. Last week it emerged that year-on-year growth had slid to a seven-year low of 5.3% in the first quarter, a sharp decline from the near double-digit pace seen in 2004-2008. India's main inflation gauge, the wholesale price index, has ticked up from 7.2% in April to 7.5% in May. Consumer price inflation is in double digits. The central bank confounded expectations by deciding not to cut interest rates this week.

What the commentators said

The central bank has been under pressure to follow up a recent interest-rate cut with another, said Harsh Joshi in The Wall Street Journal. But "the decision was a good one". As it pointed out, high interest rates aren't the main reason the economy is sputtering: growth flourished in 2003-2008, when real interest rates were higher. Its room for manoeuvre is limited by inflation. The currency has slumped while "a wage-price spiral is firmly ingrained", said Indranil Pan of Kotak Mahindra Bank.

The underlying problem holding back growth is a lack of domestic investment. That's due to the government running a large fiscal deficit that is crowding out private sector investment, which it has also undermined through "graft, red tape and confusion", said The Economist. The vacillating government, a decrepit state machine and an increasingly fragmented political backdrop have all thwarted efforts to get structural reforms back on track and bolster India's growth potential.

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A loss of confidence by foreign investors has sent stocks and the currency hurtling downwards. It looks as though "India's feeble politics are ushering in several years of feebler economic growth", said The Economist. Even in the unlikely event of the government getting its act together, it would take time for the benefits to be felt and growth to pick up. The Indian growth "miracle" of recent years now "feels like a mirage". So much for the slogan Incredible India'.