Could This Be India's Golden Moment?

The first quarter of this year saw India’s economy grow a mere 5.3 percent, the slowest rate in nine years. The single biggest factor has been the hefty increase in benchmark interest rates by the Reserve Bank of India over the past two years—from 4.25 percent in January 2010 to 8.5 percent in January 2012. While the central bank’s motivation has been to keep inflation in check, a direct side effect of the interest rate hikes has been a rapid cool-down of the pace of investments in infrastructure and the manufacturing sector.

A second major factor has been India’s worsening trade deficit, caused primarily by a growing appetite for oil and coal coupled with an increase in the price of these commodities. During the fiscal year ended March 2012, India did extremely well as on the export front: Shipments grew by a stellar 21 percent to a record $322 billion. What hurt India, however, was that imports grew even more sharply—by a huge 32 percent, to $489 billion.