But any effort to deal with the underlying problems that plague the Indian economy runs directly into powerful political interests.
On Tuesday, India’s government said inflation increased 9.1 percent in May, compared with a year earlier, a higher rate than expected.
That came atop troubling economic data indicating India’s gross domestic product growth had slowed, as companies spent less, foreign investment dropped and bad loans piled up at some banks.
While India’s long-term prospects remain strong, many economists and analysts say the country’s central government needs to act quickly to ensure the short-term problems do not intensify. While slower growth could help curb inflation, critics are not confident the government has the policy finesse to address either problem adequately.
India faces “an unpleasant trinity of moderating growth, high inflation and monetary tightening,” said Rajeev Malik, senior economist for the investment bank CLSA in Singapore. “It is very important that the government get its act together and begin to do something.”
In the first three months of this year, India’s annual growth rate of gross domestic product slipped to 7.8 percent — down from an 8.3 percent annual rate in the fourth quarter of last year, and short of analysts’ predictions.
The central government, led by Prime Minister Manmohan Singh, has been rocked by allegations of corruption and investigations into sweetheart deals worth billions of dollars between government ministers and businesses of various types — most notably one involving the award of wireless communications licenses. The scandals have paralyzed decision-making and stalled development projects.
India, the second-fastest growing major economy after China, continues to have long-term forces that should be in its favor.
The country’s youthful population, growing middle class and increased demand — whether for refrigerators and cars, or housing and highways — mean it could become the world’s third-largest economy after China and the United States by 2030, Standard Chartered predicted this month. India’s economy currently is currently ranked 10th, according to the International Monetary Fund.
Still, a recent flurry of negative economic indicators has set the stage for a rocky year. Inflation is a worry in most emerging markets, but critics say lapses and policy missteps by the central government have made the problem especially bad in India.
On Tuesday, the Organization for Economic Cooperation and Development, a group of leading free-market democracies, released a generally upbeat report on India’s economic prospects. But it warned that without deeper policy overhauls the country would struggle to sustain its growth targets.
“Moving to a new level of growth will require renewing the momentum of reforms,” said Ángel Gurría, secretary general of the O.E.C.D. He called for lower barriers to international trade and investment, as well as revamping of the financial sector and the labor market.
Each of those issues is enveloped in a political thicket, though. And the current government has shown little willingness to even try changes. The O.E.C.D. report highlighted India’s low spending on health — just 1 percent of the country’s G.D.P. — and the contrast to the country’s high spending on energy subsidies, at 9 percent of G.D.P.
Local investment growth slowed in the second half of the fiscal year that ended March 31 to 4.1 percent, down from a 14.7 percent rate at the beginning of the year.
Just as worrisome for an emerging economy, foreign investment in the first three months of 2011 fell 32 percent from the comparable period a year earlier, down to $3.4 billion, on top of a steep drop for all of 2010.
Meanwhile, bad loans are creeping up at some of India’s government-run banks, particularly at the largest, State Bank of India. In the quarter that ended March 31, the bank doubled the amount of provisions for nonperforming assets from the previous quarter, according to Enam Securities in Mumbai.
Car sales, one of India’s fastest-growing economic indicators, slowed in May to their slowest rate in two years, according to the Society of Automobile Manufacturers.
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