Is the India growth story losing its sheen? The question may sound pessimistic, but government officials and economic analysts continue to lower growth forecasts with each passing month — or each economic data release. The latest macroeconomic outlook published by the Reserve Bank of India adds weight to the feeling that India’s growth engine may be hitting some serious speed bumps. First, leading indicators like auto sales have shown fairly sharp declines in the last few months. Consumption demand has been declining, depressed by high interest rates. Second, investment by companies has tapered off considerably too, as shown by the amount of cash in the bank and cash equivalents — assets like tradable securities which can be converted into cash — that large and medium-sized companies are carrying on their balance sheets. Investment projects and investment demand are going south too. Most of the rest have sizeable amounts of debt instead. Third, the global economic situation — particularly in Europe — is getting worse. Efforts by the Group of 20 nations, the International Monetary Fund and the European Union notwithstanding, it is only a matter of when Greece will default on its sovereign debt, not if; the repercussions from that could be close to cataclysmic for European banks. That could hit global demand — and by extension, domestic demand in India — to huge effect.

The optimists will argue that India is still growing, even if at less than eight per cent, that domestic demand is still robust and people are still consuming in great amounts. True, the base demand remains intact, but much of the recent growth has been driven by relatively conspicuous consumption. Demand in India has a number of dynamic drivers: it is different for those in rural India whose income gains from welfare programmes like the national rural employment guarantee scheme are a big factor. In more urban India, it has been driven by perceived asset or wealth gains, like land and stock markets. Investment demand is largely driven by assessments of consumer demand, not interest rates, which can be passed through when producers lose their ability to absorb them, and thus, their pricing power. Even if the central bank heeds demands for a halt to interest rate increases, investment and demand are unlikely to pick up right away. Enforced austerity has not worked, and government spending — which can boost output growth — cannot continue.

What the government needs to do is to exercise its fiscal power, formulating and enacting good structural policies that will encourage growth and employment. That happens when there is political will and purpose, not paralysis. India is at a pregnant pause in its growth.