The Indian economy is the ninth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP). According to statistics released by the International Monetary Fund (IMF) for 2012, on per-capita-income basis, India ranked 141st by nominal gross domestic product (GDP) and 130th by GDP (PPP). India is the 19th largest exporter and the 10th largest importer in the world. During 2011–12, our foreign trade grew by an impressive 30.6 percent to reach $792.3 billion. However, the problem of deficit has persisted and we registered a deficit of $185 billion compared to the estimated $160 billion. In 2012-13, this figure swelled to $190.91 billion.

Economic growth rate slowed to around 5.0 percent for the 2012–13 fiscal year vis-vis 6.2 percent in the previous fiscal. An interesting fact to be pointed here is that in 2010-2011, we grew at an astounding 9.3 percent, almost double our present rate of growth. Today, the government remains optimistic and has forecasted a growth of 6.1-6.7 percent in the next fiscal, however, the market does not expect too much improvement.

Unemployment has also been another worrying factor for the country with a booming population. The number of jobs created between 2004-5 and 2011-12 aggregated just 23 million compared to 50 million between 1999-2000 and 2004-5. Further, as of 2011, India's public debt stood at 68.05 percent of GDP, the highest among emerging economies.

Meanwhile, inflationary pressures have started to reduce owing to the easing of commodity prices. Wholesale prices rose by 4.7 percent in May year on year, about half the rate at the peak but consumer-price inflation at 9.3 percent, remains more stubborn. But both are moderating, although slowly.

Fiscal deficit and current account deficit (CAD) are the biggest challenges for our policymakers today. Fiscal deficit was 5.2 percent of GDP in 2012-13 and CAD rose to 6.7 percent of the GDP in the December quarter, from 5.4 percent in the previous quarter. This is more than double of what was prevalent during the 1991 currency crisis. It has however, come down to 3.6 percent in the first quarter of 2013.

Adding to the already existing woes of the economy is the declining rupee. Between 2010 and 2012, the rupee value had depreciated by about 30 percent of its value to the US dollar in 2010. Compared with the other emerging economies, the rupee has been the weakest currency in the last one month. While the sharp fall in the rupee value was caused mainly by the strengthening of the US dollar, experts point that India was particularly affected because of its widening CAD brought about by huge imports of crude oil and gold in the past year.

While the government has taken various measures for boosting our economy’s performance, the prospects of a revival have only been complicated by the possible winding down of quantitative easing (QE) in the US. We have been largely dependent on the hot money to bridge our balance of payments gap. Since May this year, foreign bondholders have withdrawn around $6.5 billion since mid-May. The government has initiated steps to strictly control spending and lowering of fuel subsidies and these steps would ensure that the overall deficit in the next fiscal does not exceed 7 percent of the GDP, says Chetan Ahya of Morgan Stanley.

If one is to look at the bigger picture, it all boils down to the demand deficit and lack of confidence across all the economies. There is an urgent need for increasing public investment in various sectors, employment generation, completely avoiding wasteful expenditure, etc. And on-time implementation at the ground level is the key. According to Julian McCare of IFG, UK, “It is not necessarily true that a government has to do something about the debt level. If you have economic growth going forward, debt will (automatically) fall.”

Capital spending is what really matters— it will boost the current growth and the economy’s potential. Gross domestic savings and gross fixed investment have dipped but are still about 30 percent of GDP. However, almost half of all the savings are now directed into physical assets like gold that bypass the financial system. The quality of capital investment has also fallen, with almost half of it being spent by households mainly on construction. While China devotes 2.7 percent of its gross domestic product to government spending on health care, India allots only 1.2 percent. The most productive kind of capital investment by private firms, that build factories and buy machinery, has dropped from 14 percent of GDP in March 2008 to below 10 percent today.

Meanwhile, a slew of measures including hike in short term interest rates, liquidity adjustment facility, cash reserve ratio, quicker bringing back of export earnings and tougher norms for gold import for domestic consumption have been taken by RBI for curbing imports and strengthening the rupee. This apparently worked and the rupee had risen to 58.69 as on July 26 from the lowest of 61.21 on July 8. But it again went down and hit a new low of 61.80 on August 6. Despite the liquidity tightening measures introduced by the apex bank on July 15, the rupee has fallen 1.5 percent, and a rate cut to boost private investment and growth seems to be far off. Instead, tighter liquidity may be desired since as per RBI, every 10 percent depreciation adds 120 basis points to inflation due to higher import costs being passed on to consumers and an increase in fuel prices leads to higher fiscal deficit to the extent that the government absorbs part of the increase.

However, there has been an interesting coincidence as the rupee recovered to 60.81 with the appointment of Raghuram Rajan as the new RBI governor. It, therefore, would be interesting to see how the new governor tackles the crisis.