Was India’s 2003-08 growth phase a fundamental driven boom or debt-led cyclical boom?

As India’s growth story has bitten the dust, experts have started looking at other reasons. Some question India’s growth story  and others call it a temporary slowdown. A bigger question is whether 2003-08 growth story was indeed true or too good to be true. I have always questioned the story no matter what experts say. My idea is simply that it coincided with a  global boom where most countries grew at a faster rate. So if India’s story is indeed true it has to look for some different period and prove its potential post-crisis. Experts point to all kinds of macros which are in India’s favor but fail to look at India’s falling institutions which will always challenge the sustainability of growth. Anyways it will be an interesting thing to watch out in future on who wins?

This paper by R. Nagaraj of IGIDR in EPW shows why India’s growth was much like other countries -debt-driven fulled by capital inflows:

From 2003, the Indian economy enjoyed a boom in growth for five years. The economy grew at a rate close to 9% per year, until it was punctured by the financial crisis of 2008. What explains that boom? Did the sustained liberal reforms finally pay off? Or was it a debt-led, cyclical boom, coinciding with an exceptional phase in the world economy? This paper contends that it was the latter case, driven by private corporate investments, financed by rising domestic savings, and topped by unprecedented inflows of foreign capital- leaving behind heightened corporate leverage, and frothy asset markets. As the global economy faces a semi-slump and precarious macroeconomic balance, how to reverse the current slowdown is at the crux of the discourse on India’s policy paralysis. With the corporate sector mired in over-leverage, perhaps the most credible policy options now available are to step up public infrastructure to boost investment demand, and expand bank credit on easy terms to the informal sector and agriculture – which were throttled during the boom years – so as to ease supply constraints.

Very interesting paper against the grain. It debunks quite a few myths on 2003-08 growth phase along the way..