Is India heading to pre-2003 level of growth?

About a fortnight ago, India shocked the investor community with a GDP growth number of 5.3%. Though everyone was expecting a slowdown, no one was prepared for a nine year low in the growth numbers. Therefore, it was not very surprising that nearly every major research house started to revisit their estimates for the economy. And they all started coming with their own 'new normal' numbers which ranged between 5 to 6%. The latest to join the bandwagon is Morgan Stanley. In fact its head of emerging markets, Mr Ruchir Sharma, has gone two steps ahead and has stated that the stellar rates seen in the recent past was a fluke.

In an interview to a leading daily, Mr Sharma has stated that the 8-9% GDP growth rates seen between 2003 to 2008 were nothing but a fluke. They were a function of global factors. The most important of these was higher liquidity. As most developed countries were printing money, a large part of this money had flowed freely into the emerging markets including India. This had led to an increase in the prices of all the asset classes leading to the kind of economic growth that we had grown used to seeing. However, in his opinion, this growth was not driven by the internal factors. Which is why, as liquidity has started to dry up, these emerging market countries are seeing their growths slow down. And therefore, India's growth would pretty much mirror its pre-2003 levels in the times to come. In his opinion, the only way to get out of this mess is for the government to introduce reforms at a fast rate.

We do agree with Mr Sharma on the need for speedy reforms. However, we do believe that the view being taken of India's above 8% growth rates being a fluke is a bit too pessimistic. It is true that government inaction and policy paralysis has hurt the economy. But stating that the growth rates were just a fluke is unfair. The companies have witnessed stellar growth in their revenues and profitability during the same period. India did see demand for its goods and services, both domestic as well as export, surge up during the same time. The thing is that India was on the path of growth. The reforms made earlier could drive the growth thus far. What is needed now is a boost for the next leg. And that would come only through proactive action and decision making by the government. Once that happens, we would go back to the above 8% growth rates that we saw in the past few years. The glitch is only for short to medium term. The long term story for our country still remains intact.