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For the past several years, the questions surrounding India’s stellar annual economic growth have been, basically: Will it reach 10%, as Prime Minister Manmohan Singh has targeted? Will it be 9%, which it reached a few years ago? Or will it just be 8%, which is pretty great, all things considered, but maybe not transformative?

Noah Seelam/Agence France-Presse/Getty Images
Soaring inflation has eaten into the spending power of India’s poor masses, especially in food.

Now, the answer appears to be: None of the above.
It’s time, many economists say, to get used to talking about India’s Gross Domestic Product growth beginning with 7. As it was in the January to March quarter, according to data released today: annual GDP growth stood at 7.8%.

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For the year ended March 31, the economy was still safely in the 8s–8.5%, to be exact. But that is likely to be the last 8 India will see for some time.
The chief culprits are well known: Soaring inflation has eaten into the spending power of India’s poor masses, especially in food. In response, the Reserve Bank of India has embarked on a tightening spree that has raised rates and limited credit, squeezing expansion.
The backdrop is also significant: A string of corruption scandals has soured foreign investors on India, with direct investment numbers down dramatically. And the government’s much talked-about reforms that could reverse that remain just that–much talked-about and not acted on. India’s private sector is doubtless vibrant, but it can only do so much in the face of government apathy. (This is something the Journal has been looking at in recent articles on education and the Indian economy.)
So there appears little prospect that the good old days will return anytime soon.
“Growth will slow in response to the lagged effect of the monetary tightening undertaken so far and the additional hikes still expected. Also, with output at or above potential, the economy faces a natural speed limit. Finally, the elevated level of inflation will also in itself dent growth, including by raising uncertainties about economic prospects until it is firmly under control,” wrote Leif Lybecker Eskesen, economist for India at HSBC Global Research in Singapore, in a note Tuesday.
All this is likely to turn off international investors, who have been huge contributors to India’s boom through stock market and direct investments. They will need to assess whether they remain as keen on India in the new era, according to Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities Ltd.
“During the past 5-6 years, India was the top attractive investment destination amongst the global investors despite the concerns such as governance deficit, corporate governance issues, infrastructure deficit and inflation,” he wrote in a report. “But, now for the first time after 5-6 years, India is facing inevitable challenge of slowing GDP growth. So, with this slowing GDP growth, it needs to be seen how much attraction India could able to manage from the global investors going forward.”
Many economists now expect economic growth in the year ending March 31, 2012, to be in the 7.5% range; some expect it even lower. But the consensus remains that growth will then pick up back over 8% the following year.
Robert Prior-Wandesforde, head of India and South East Asia Economics at Credit Suisse, disagrees. With the RBI showing no signs of stopping its tightening–combined with the length of time it takes for such tightening to take effect–he said in a note Tuesday that not only does he expect 7.5% growth this year but he expects the same again in the year ending March 31, 2013, almost two years from now.
That’s a scenario investors will want to think about seriously. As he notes: “We doubt the equity market has fully priced in all the bad news as yet.”

Via: India Real Time