Why India Slowed

One example of a new institution is the Cabinet Committee on Investment, which has been created to facilitate the completion of large projects. By bringing together the key ministers, the committee has coordinated and accelerated decision-making, and has already approved tens of billions of dollars in spending in its first few meetings.

In addition to more investment, India needs less consumption and higher savings. The government has taken a first step by tightening its own budget and spending less, especially on distortionary subsidies. Households also need stronger incentives to increase financial savings. New fixed-income instruments, such as inflation-indexed bonds, will help. So will lower inflation, which raises real returns on bank deposits. Lower government spending, together with tight monetary policy, are contributing to greater price stability.

If all goes well, India’s economy should recover and return to its recent 8% average in the next couple of years. Enormous new projects are in the works to sustain this growth. For example, the planned Delhi-Mumbai Industrial Corridor, a project with Japanese collaboration entailing more than $90 billion in investment, will link Delhi to Mumbai’s ports, covering an overall length of 1,483 kilometers (921 miles) and passing through six states. The project includes nine large industrial zones, high-speed freight lines, three ports, six airports, a six-lane expressway, and a 4,000-megawatt power plant.

We have already seen a significant boost to economic activity from India’s construction of its highway system. The boost to jobs and growth from the Delhi-Mumbai Industrial Corridor, linking the country’s political and financial capitals, could be significantly greater.

To the extent that democratic responses to institutional incapacity will contribute to stronger and more sustainable growth, India’s economic clouds have a silver lining. But if India’s politicians engage in point-scoring rather than institution-building, the current slowdown may portend stormy weather ahead.

Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business and the chief economic adviser in India's finance ministry, is the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

Copyright: Project Syndicate, 2013.

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