Is India Heading Towards Another Economic Crisis?

What is GDP?

Gross Domestic Product (GDP) can be defined as the market value of all the officially acknowledged finished goods and services that are produced in a country in a year or any other given span of time. The per capita GDP of a country is often considered as a yardstick for the standard of living for the population of a country.

World Bank forecasts for the economic growth of India:

Is our country heading for another cloud of economic uncertainty? Much depends on the economic policies of the forthcoming Government to be formed after the 2014 Lok Sabha elections. However, the projections of the World Bank pertaining to the country’s economy appear to be quite grim. In contrast to its earlier projections in April, where the economic growth rate of the country was predicted to be 6.1%, the recent reports of the multi-lateral organization indicate a growth rate of 4.7%.

Just when both the Reserve Bank of India and the Finance Ministry are expecting a growth rate of 5 to 5.5%, this sheer drop of 1.4% in the growth rate of the country as per the recent evaluations of the World Bank comes as a financial discouragement. As per the estimations of Martin Rama, the World Bank’s chief economist for South Asia, the slump of 1.4 in the growth rate has been attributed to a slow business progress and high rates of interest in the July-September span of the fiscal and is expected to remain low. However, as per the predictions, the growth rate may pick up in the second half of the fiscal year.

Other important economic aspects outlined in the biannual update report of the World Bank, designated ‘India Development Update’, include projections on inflation and the Current Account Deficit (CAD). The inflation rate, which had recorded an all-time high of 6.46% in September mainly due to the exorbitant hike in the prices of food, is expected to come down. Such a decrease in the inflation rate is probable to stem from an expected high agricultural yield. This will also contribute to a moderation of the excessive food prices.

Once again, in contrast to the earlier projections for the Wholesale Price Index (WPI) inflation rates of 6.7%, the revised estimations are calibrated at 5.3% for the current fiscal. As for the CAD, the revised estimates indicate that the CAD will stand at 4.1% of the GDP as opposed to the earlier projections of 4.3% of the GDP.

Prior to the World Bank forecasts, International Monetary Fund (IMF) had painted an even grimmer picture for the economic growth of the country. In its report ‘World Economic Outlook’, the prime financial mouthpiece had predicted the economic growth rate of the country to be only a meagre 3.75%. Once again, this had been a revised estimate of the IMF as opposed to its earlier projection of a growth rate of 5.6% that had been announced in July. Finance Minister P Chidambaram had, however, brushed off the IMF’s economic projections for the country on the grounds of previous discrepancies between the IMF cited figures and reality. Calling in question IMF’s mathematics for formulating economic projections for India, Chidambaram had further remarked, “We do not share this pessimistic outlook”.

However, C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council is far from happy with the estimated GDP figures. In short, while the potential for the economic growth of the country cannot be doubted, high inflation rates, a nearly unmanageable CAD, and the slump of the rupee in the international market are likely to reflect on the economic recovery of the country. Such deterring factors will evidently cause economic deceleration in the absence of prudent implementation of necessary economic reforms.

ASSOCHAM forecasts for the economic growth of India:

The forecasts of the apex body ASSOCHAM, according to the paper ‘ASSOCHAM Projections – India’s Growth Performance in 2013 – 2014 Q2’, furnished by the ASSOCHAM Economic Research Bureau (AERB), are slightly more encouraging. The paper confirms an agricultural growth of 4.25%, industrial growth of 3% and services sector growth of 7% in the second quarter of the 2013-14 fiscal year. The ample monsoon of 2013 had made it possible for 74% of the 622 districts of the nation to receive adequate rainfall. This had resulted in an increased cultivation of kharif crops covering an area of 1,033.6 lakh hectares as compared to the 979 lakh hectares for the same period last year. As confirmed by the ASSOCHAM report, such bumper agricultural yield will also contribute to the economic growth of the country.


What do all these facts and figures translate into? As projected by the World Bank reports, a slow economic growth of the country means negative business sentiments, high interest rates and low exports. A significantly low export rate will mean imports will be higher than the exports, which will reflect in a high CAD for the country. A high CAD also means high inflation rates which will result in an increase in the WPI. Low business activities will be directly responsible for a low GDP for the nation.

Planning Commission Deputy Chairman Montek Singh Ahluwalia seems unperturbed by the discouraging forecasts of the World Bank. Mr Ahluwalia had opined that such facts and figures as furnished by the World Bank reports need not be looked upon as a cause for alarm in the light of the present 5% economic growth rate of the country. Mr Ahluwalia is further optimistic that such growth rates will touch 7.5% if correct economic policies are implemented.

As mentioned before and as further confirmed by Mr. Ahluwalia, the new Government formed after the completion of the 2014 Lok Sabha elections will inherit the economic instabilities of the country. It will be largely up to the new Government to initiate prudent economic reforms and decisions to prevent the growth rate of the country from decelerating.

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