In India, as well as in some other emerging markets, the previous boom was associated with credit-driven bubbles.
The rapid reversal of capital flows – if it is sustained (which it need not be) – will accelerate the process of bursting of such bubbles, with attendant consequences on growth.
In addition, the Indian economy faces a somewhat peculiar trend at present, with slower growth accompanied by still high inflationary pressures.
The underlying growth potential of the Indian economy is significant, but it needs to be supported by policy measures that emphasise the provision of basic physical and social infrastructure as well as employment generation, viability of small enterprises including in farming as well as non-agricultural activities, and universal provision of social services like health sanitation and education.
Image: Prime Minister Manmohan Singh, left, seen at a youth Congress party convention in New Delhi.