Once the toast of global corporations, the India story is beginning to turn sour.

IT is India Shining no more. The heady slogan of the Vajpayee Government, on which it fought and lost the 2004 parliamentary poll, now sounds hollow.

Eight years on, the economy is in the grip of a slowdown with the GDP growth coming down to below seven per cent , well below the official projections of 9% to 9.5%.

A decade or so ago, India was the toast of the global corporate boardrooms, showing promise as an attractive destination for foreign investments.

Big brands and multinationals were keen to set up shop here. A number of marquee foreign consumer brands had come to India either on their own or through local partners. Overnight, the automobile sector actually looked crowded. All major manufacturers, including such luxury carmakers as Mercedes, BMW, Audi, Jaguar and Rolls Royce had begun operations in the country.

Because the India Shining slogan was associated with the previous National Democratic regime, it was abandoned. Instead, under the Manmohan Singh Government an equally evocative tagline, Emerging India, was found to market the country globally.

So heady was the mood in some quarters between 2004-07 that most commentators made comparisons between India and China, enthusing about the two fastest growing economies in Asia.

However, the India story began to sour a couple of years ago. While government experts talked of attaining a sustained 10% growth over a period of two decades to lift over a good half of the billion-plus population out of poverty, actual growth rate began to falter.

After registering a near 9% GDP growth for three consecutive years beginning 2003-04, there was a marked slowdown.

Following the 2008 Wall Street crisis, which caused economic tremors globally, the overall growth rate was 6.7%. A series of stimulus packages had bolstered the economy in the wake of the collapse of Lehman Brothers.

It helped that the Indian economy was not overly reliant on exports. At the time, policy makers had boasted that despite the global financial crisis, they had managed to insulate India against its negative fall-out.

That the economy still did not get back its rhythm was now clear from the latest numbers released by the Central Statistics Office on Tuesday.

In the financial year ending March 31, growth is estimated to be 6.9% against 8.4 % recorded in 2010-11. Indeed, the CSO expects that the growth in the second half of 2011-12 is likely to decelerate to 6.5% since the first half of the financial year had recorded a growth of 7.3%. In other words, the economy would expand at the slowest pace in three years.

Why has it come about? Well, there is near unanimity that the policy paralysis in the Government coupled with a series of corruption scams has shattered the confidence of the economic community. Foreign investors were wary of India in a climate of political uncertainty. High interest rates – the central bank called a halt to rate increase a couple of weeks ago after 13 straight quarterly hikes – made fresh investments unviable.

Inflation was a major concern of the Reserve Bank of India. At one stage, inflation was running high in double digits, with food prices registering a 20% increase. Thanks to the arrival of fresh farm crops in recent weeks, food inflation had now moderated, but overall inflation was still not in the comfort zone.

Contraction in growth also resulted from the slowdown in factory output. The manufacturing sector grew at a mere 3.9% against 7.6% last year, an indication of poor demand and investment climate. The construction sector slowed down due to poor off-take of housing stock and high prices. Higher outgo on bank loans for housing was also a dampner.

Major real estate companies were saddled with high inventories of built-up houses, commercial space and land banks, costing them heavily in holding charges.

Mining was another key area where there was a major slowdown. The dip in demand for exports was followed by scams in the sector with mine-owners illegally expanding operations far beyond the sanctioned limits. Following public exposure of the mining scams, the Supreme Court ordered a blanket ban on exports while State Governments clamped down on miners for extracting iron ore far in excess of the permissible limits. The outcome was a sharp slowdown in the sector.

Exports was another area which suffered growth contraction due to adverse global conditions. Both North America and Europe were in the grip of financial crises, resulting in a reduced demand for imported goods. High energy and commodity prices also moderated demand both in the external and domestic markets.

Commenting on the sombre economic numbers released by the Central Statistics Office, Finance Minister Pranab Mukherjee said, “Though figures of advance estimates for GDP for the current fiscal look somewhat disappointing by our recent growth experience, yet considering the current global context and the slowdown in the domestic industrial sector in particular, the growth performance is not all that surprising.”

What Mukherjee would not say is that he himself is worried over the fiscal situation with deficit far outstripping the budgetary target of 4.6% by at least one full per cent. Combined with the deficit of state governments, the fiscal deficit in the current financial year could be close to 10% of GDP. The worsening fiscal situation in turn put pressure on the currency and led world renowned rating agencies to lower the sovereign ratings of India by a notch or two.

Political turmoil

However, if one were to cite a single factor for the economic slowdown, it will have to be the current political mess in the government.

A scam-hit government has been battered so much from all sides, including the judiciary and civil society activists, that all its energies are expended in ensuring survival.

Structural reforms have been virtually abandoned. Economic policy initiatives have become a thing of the past. Major investment decisions are shrouded in controversy. Allocation for big infrastructure projects has dried up. The cumulative effect of a policy paralysis is the creeping economic slowdown.

What about the new year? Economic pundits see a ray of hope in the fact that after a sharp dip, the rupee was bouncing back, inflation was moderating, share markets had pepped up a little, interest rates could be lowered by the central bank and, should the ruling coalition do well in the on-going State elections, the Government could get its confidence back to take policy initiatives.

In other words, future economic growth would depend crucially on the Government emerging unscathed from the current climate of drift and dithering.

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