Just when we were all convinced that GDP growth is all set to hit double digits, we have some early signs of a slowdown. Is it possible that the growth rate has peaked in the medium term? By Vivek Sharma

Until very recently, most of us had no doubt that India's GDP growth rate was on a relentless upward march - come what may. It was also considered a certainty that we would soon catch up with our great adversary China, and start clocking double-digit growth rates. We wasted no opportunity in convincing ourselves that our growth was less sensitive to exports, unlike China's and, therefore, more sustainable. The lumbering Indian elephant was morphing into an agile tiger and growing stripes and whiskers.

It is not that all that talk was a sustained bout of self-delusion. The economy did indeed break free of many shackles and entered a higher growth trajectory. As manufacturing matched the services sector, industrial growth reached peaks that were unimaginable even a few years back. Though it did not contribute much, agriculture held on to modest growth rates.

Helped by easier credit, consumer spending increased dramatically. Foreign investments touched record highs. Property prices surged and the stock markets never looked better. There was newfound confidence that we would progress, despite a lacklustre government.

Of late, some of these presumptions are being questioned. For the first time in more than three years, we are faced with the prospect of a modest decline in aggregate growth rate. How real is this scenario? Can it worsen? And more importantly, what needs to be done to regain the momentum and attain double-digit growth?

Core sector concerns
The first sign of worry was the erratic monthly industrial growth during the second half of 2007. While December numbers are yet to come out, industrial growth in November was an anaemic 5.3 per cent - the lowest in 13 months. Manufacturing growth, which was 17.2 per cent a year ago, fell sharply to 5.4 per cent.

Growth rates for the six core infrastructure sectors have seen a weak trend in recent months. For the first eight months of the current financial year, core sector growth has slipped to 6 per cent from 8.9 per cent for the same period in the previous year. Deceleration in core sector output could be a precursor of a slowdown in manufacturing. And, that is worrying.

Services may not save the day
Given the subdued outlook for technology services, on the back of a stronger rupee and a possible recession in the US, which will curb technology spending, domestic services will have to perform exceedingly well to sustain aggregate growth in the sector. After many years of rapid expansion, that looks difficult.

The substantial increase in employee costs has already started affecting services growth. An even bigger challenge is the increasing difficulty in finding the right talent in sufficient numbers. As this will only become even more difficult in future, it will add to the cost pressures.

Inflation risks and interest rates
Interest rate cuts and fiscal measures like lower tax rates can help stimulate growth. But the RBI will find it difficult to bring down interest rates at will, because of inflationary risks. On the face of it, inflation looks under control - even after adjusting for the continuing government benevolence on fuel prices. But, there are cost pressures building up - like higher wages and commodity prices - which will not be offset by efficiency gains beyond a point. Rising food prices are another concern.

While the government's tax revenues have gone up substantially, largely an outcome of overall growth, it is unlikely that tax rates will be brought down as government expenses have also kept pace. If oil and commodity prices remain high, there will be pressure on the government to bring down indirect taxes on these goods to rein in inflation. That will further reduce the scope to lower direct tax rates.

Besides, tax cuts are always politically sensitive even though the effectiveness of tax cuts in boosting economic growth is well established. We cannot blame our communists alone, even the Americans are yet to be convinced.

Global deceleration will affect us
Most commentators were touting the decoupling theory to convince us that emerging economies have assumed lives of their own and will no longer be hemmed in by weakness in developed markets. The basis of this theory was that domestic consumption in China and India would replace any slack in the US, Europe and Japan, and aggregate global growth would be largely unaffected. That looks increasingly unlikely.

Despite all the hopes, the fact remains that consumer markets in emerging economies are not as big as those in developed markets. It will take many more years of fast-paced growth before that can happen. Besides, income levels in emerging economies - especially in China - are disproportionately tied to consumer spending in the US and Europe. Any slowdown in the developed economies will impact growth and income levels in emerging economies. A slowdown in developed economies may not be as disastrous for the less developed economies as it used to be previous decades, but it will be foolish to presume that we are completely insulated.

What will be the impact of a global deceleration on India's growth? The government, including the Planning Commission, says it will be around 0.5 percentage points (See: Global slowdown could dent India's growth by half a percentage point: Montek Singh Ahluwalia). That may be true if it is a modest decline, but if the US recessions is deeper and more prolonged, it could be worse.

No doomsday scenarios either
It is equally unlikely that we will see a sharp deceleration, either. All said and done, India is the least vulnerable to global risks - simply because it is the least exposed. Our economy is not driven by commodity prices, as in Russia and Brazil. We are not overtly dependent on exports, like China. Even in exports, except in labour intensive segments like textiles, our global competitiveness is unquestionably better and sustainable.

Even in the worst-case scenario, it is inconceivable that our growth rates will dip below the 7 per cent. A deceleration of that magnitude will happen only if the global weakness is much worse and prolonged than feared, and our farm sector faces a couple of really bad seasons.

What needs to be done?
Much of our recent growth has not been very inclusive, as it was driven mostly by growth in urban centres. Yes, the communists are right in this, but their prescriptions to correct the imbalance will kill even the modest progress we have achieved.

Undoubtedly, even the rural areas have also benefited from the overall growth. Except those who want to make a political point, it is unlikely that many would contend that those who are less equipped to take advantage of a more open economy have not benefited at all.

It is also unquestionable that small-town and rural India have to really join the party, if we are to sustain growth - and accelerate it to double digits. But, that is easier said than done. Contrary to what the apologists of socialism would like us to believe, it is urban India, which benefited more even in the days of socialism. It is the competencies developed during that period, in terms of better education, healthcare and better awareness about the opportunities, which helped urban India perform better when the environment changed.

Decades of underinvestment in rural education, healthcare and transport infrastructure continue to shackle vast areas of our economy. Yes, things have improved in the last decade or so - especially in transport infrastructure and telecom. But, we are still not investing enough to develop human capital in rural areas.

It is easy to talk about the next generation of reforms to sustain growth. But the fact remains that there are not many areas where incremental reforms can yield sustainable growth. We need a paradigm shift to transform the entire country into a unified growth engine. Token programmes like the rural job guarantee scheme, which at best will keep a few out of poverty at a disproportionately high cost, will not do.

We need programmes to help Indian at every step of the socio economic ladder realise their aspirations for better opportunities and lives, in terms of superior education facilities, access to information and healthcare. We should invest heavily in research and technology which will create market opportunities to deploy our collective skills. And, we should develop sufficient infrastructure to help unleash our potential. To achieve that, we need a government with a bold vision - and the courage and ability to implement it.