Drop in Investment Slows Indian Growth

Growth expected to decline to 5.4 percent this year

Facilitate investment by addressing supply bottlenecks, say IMF economists

Comprehensive overhaul of fuel subsidies is key to bringing down budget deficit

In 2011/12, India’s growth rate was 6.5 percent. That figure is expected to drop to 5.4 percent in 2012/13. Despite the poor outlook for the global economy, this is a far larger drop than might be expected.

Growth outpaces investment

Between 2004–11—a period that includes the global financial crisis—India’s growth averaged 8.3 percent a year. High growth and higher incomes added to demand, especially for food, electricity, and transportation.

This growth outpaced new investment in power plants, roads, and coal production. As concern about corruption scandals slowed approvals for new projects, supply bottlenecks became evident, culminating in the July 2012 blackout across much of India, when a tenth of the world’s population lost power for up to two days.

India’s recently published 12th Plan calls for major investments in infrastructure, health, and education, as well as for continued poverty reduction, but in their report, IMF economists say reforms to facilitate investment—especially in infrastructure—together with lower costs to do business, are key to restoring high growth.

The government has already taken significant steps to restore growth, for example by laying out a plan to cut the losses of local power companies, creating the Cabinet Committee on Investment, and relaxing some restrictions on foreign direct investment.

But more needs to be done. Addressing India’s long-term energy needs, for example, will require solving complicated problems related to coal (which powers most of India’s electricity plants), while...