On February 7, the government of India revised its growth forecast for India down to 5%:
Gross Domestic Product (GDP) at factor cost at constant (2004-05) prices in the year 2012-13 is likely to attain a level of Rs.55,03,476 crore, as against the First Revised Estimate of GDP for the year 2011-12 of Rs. 52,43,582 crore, released on 31st January 2013. The growth in GDP during 2012-13 is estimated at 5.0 per cent as compared to the growth rate of 6.2 per cent in 2011-12.
These are of course estimates, or someone's best statistical analysis based on current factors. In other words, it could change at any time.
However, there are other structural problems, as pointed out in a recent IMF report:
The economy is in a weaker position than before the GFC, with strictly circumscribed policy space and greater domestic and external vulnerabilities. Inflation and the fiscal deficit remain among the highest in EMs. At the same time, the financial positions of banks and corporates, both strong before 2009, have deteriorated. The current account deficit (CAD) widened to 4.2 percent
of GDP in 2011/12 and other external vulnerability indicators have deteriorated, which led to a sharp depreciation of the rupee in 2011 and early 2012.
Put another way, this is not the relatively simply situation where a country that supplies cheap labor to the world sees a period of slow growth because the rest of the world is slowing down, and therefore not purchasing that labor. There are other issues that are contributing to the slowdown.
The IMF has identified three problems on the supply side that are hurting growth:
Rising policy uncertainty. In particular, high profile tax policy decisions announced in the 2012/13 Budget have reduced foreign investors’ interest in India, while the increasing difficulty of obtaining land use and environmental permits have raised regulatory uncertainty for infrastructure and other large-scale projects.
Delayed project approvals and implementation. As a reaction to recent high-profile governance scandals, project approvals, clearances, and implementation have slowed sharply.
Supply bottlenecks are particularly pronounced in mining and power, with attendant consequences for the broader economy, especially manufacturing.
In addition, India has a high budget deficit:
And current account deficit:
The biggest problem faced by India is that as its rate of growth slows, it won't be able to absorb its population growth into the ranks of the employed. Remember that with a population of over 1 billion, India needs a very high growth rate just to keep up with population growth. Slow economic growth down and you get an increase in poverty.