Need new round of reforms to benefit from earlier ones

In the last week of December, there were reports of Foreign Portfolio Investor (FPI) inflows being down 99% from the previous year.

- Arindam Bhattacharya

Reasons ranged from high returns from the United States (US) market, a depreciating rupee, and a shift from public/secondary to private/primary markets, which could reverse as markets changed.

Then came the news that the estimated Gross Domestic Product (GDP) growth for 2024-25 would be around 6.4%, below the Reserve Bank of India's estimates.

Among the explanations offered were muted private investment, weak consumption growth, and high interest rates. A narrative was forwarded that these are short-term challenges and that we should see an upturn within a few quarters. When such data comes out at the year-end, it gives one the latitude to pause, reflect, and explore if a deeper theme or a missing pattern is at play.

I started by looking at the past for economic patterns that could explain the present. Starting with the overall GDP, if we look at the five-year average over three decades since 1991, it is a flattened inverted U-curve. India's growth, which used to remain below 6%, crossed this threshold in 1991-96 as the benefits of the 1991 reforms kicked in. Growth peaked at 8.5% for 2006-11 and, since then, has been inching down towards 7% and below.

During this period, we have had three waves of reforms, one in each decade and each addressing a different part of the economy: Economic reforms in the 1990s; social/development sector reforms in the 2000s; and financial system (banking, bankruptcy, and taxes) and infrastructure (physical and digital) reforms in the 2010s. Together, these should have delivered sustained economic growth above 8%.

The world has changed dramatically, but is that the reason for the growth to taper off? Or are we reaching the law of diminishing returns without a fourth wave of reforms to unlock their full benefits?