The growth experience of the Indian economy in the post-reforms period, viewed through a business cycle framework, suggests that we are on the threshold of another spell of good growth.

Growth averaged 6.5 per cent per annum during 1993-97, followed by 5.4 per cent during 1998-2003. The period 2004-08 was another phase of very high growth of 8.7 per annum. The 2009-13/14 phase has seen another patch of subdued growth of 6.8 per cent. Going by this pattern, we should expect a growth rebound during 2015-19.

Growth during Q1 of 2013-14 was 4.4 per cent, the lowest since the quarter ended June 2009. Growth in Q2 of 2013-14 was reported at 4.8 per cent, which suggests that the economy has bottomed out. This is because, given the savings and investment rate, growth in India perhaps can’t fall below 4.5 per cent, if there is no further deterioration in resource use efficiency (or increase in incremental capital output ratio).

Positive signs There are other indications that suggest an uptick in economic activity. For instance, the manufacturing PMI, which was below 50 since July 2013, has been reported to be 51.3 for November, backed by new orders and output.A survey of 1,600 executives in October 2013 across 72 countries indicates renewed faith in the Indian economy’s capacity to deliver. India turned out to be the most preferred investment destination for these executives in the next one year.

The 2004-08 phase of high growth was supported by buoyant global growth. Global growth, according to estimates by Citigroup, is expected to gradually improve from 1.9 per cent in 2013 to 3.1 per cent in 2014, 3.5 per cent in 2015 and 4 per cent in 2016. Better global growth prospects, coupled with rupee depreciation, augur well for exports growth. Exchange rate depreciation over the last two years has been a blessing in disguise, as it will provide a competitive edge to Indian exporters.

Investment-driven The Finance Minister recently shared his growth forecast for India. He expects growth in 2013-14 to be around 5 per cent; it is expected to increase to 6 per cent in 2014-15, 7 per cent in 2015-16 and 8 per cent in 2016-17. However, the recovery and the boom phase of the business cycle will play out only if growth is investment-driven, as in the previous boom phase, 2004-08. Savings and investment surged to record high levels by 2007-08. The recent slowdown can be traced to the monetary and fiscal easing after the global financial crisis. This was oriented to give a stimulus to consumption rather than investment, and therefore resulted in inflationary pressures. Thereafter, tight monetary policy to control inflation along with poor governance and policy logjam contributed to a severe growth slowdown. Policymakers should address the inflation issue and revival of the private investment cycle through structural reforms.

(The author is Dean, Xavier Institute of Management, Bhubaneswar. Views are personal.)

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