Dream Run of Economy 2003-2008

India experienced ‘dream run’ from 2003 till 2008 as it grew at an average rate of 9 percent. It was a debt-led growth, financed by burgeoning bank credit to the private corporate sector, and boosted by a surge in foreign private capital in three principal streams, namely, FDI, FPI and FCCBs. FDI rose from 0.6% of GDP in 2003-04 to 2.8% of GDP in 2007-8; and, the total capital inflow (sum of FDI, FPI and ECCBs) reached 10% of GDP just before the financial crisis struck in 2008.

The growth was export-led as there was a sharp upturn in world trade due to technological advancements coupled with deregulation of the US financial sector. Though the period of ‘dream run’ gave exponential returns to the economy but this progress had a narrow base, incremental output was only coming from a few industries as investments were skewed towards such industries with a marginal rise in the infrastructure. Between 2004-05 and 2009-10, the employment growth rate was abysmal even though the wages went up across the board.

Disproportionately faster growth of credit and capital inflows, compared to the rate of fixed investment growth, especially in infrastructure, raised corporate leverage. It is hypothesised that such funds found their way into asset markets, stoking the prices of stocks, land and property, which have remained stubbornly high, despite the economic slowdown and decline in corporate profitability after the financial crisis. It was a debt-led boom leading to rapid monetary expansion, inflationary pressures, real exchange rate appreciation and widening current account deficits. 

Thank You

Regards
Author- Arushi Singh
Kautilya
IBS Mumbai