What happened till now:
In 1991, there was serious economic crisis, the worst balance of payment problem since independence. The economic reforms adopted by India were to stabilize the economy, de-regulate the real and financial sector, etc. The economy bounced back in 1995. The stats for 95-96 showed good signs of growth.
The growth started to slow down after 95.There were many supply-sided and demand-side theories that suggest the reason for this slowdown. The government decided to reduce the liquidity by controlling the CRR and SLR. This caused a credit crunch, which got worse due to government borrowing to finance its revenue deficit.
Economists decided that the reason for slowing in growth was due to this credit crunch. Then, two monetary policies, to increase liquidity were introduced. But still, the economy did not revive. This made it clear that the reason for the state of economy is not credit crunch.
On further analysis, it was found that the growth in consumer durables sector was slowing down. The capital goods sector and industrial sector had maintained their growth. At the end of FY 96-97, the economy felt like it had stagnated. This was due to the high tax rates, interest rates, low demand and bad infrastructure. The policies of the government had reduced the interest rates, but the banks were not willing to give loans. They invested their money in government securities.
All these led to slow economy. Situation got worse in 2001, with industrial growth reaching 5.2% and agriculture at 1.6%. RBI was confused and tired. The monetary policies did not have any desirable effect on the economy.
In 2003, the economy started getting up. The corporates of India were showing good signs. Many companies started recording profit this year. Many companies have accepted the new situation where demand is dynamic. The market has highly competitive and to stay afloat in this type of market, the structure of the companies had to be changed. Companies started to reduce costs, capital overhead and become very flexible. Companies have bettered their supply chain, thus reducing costs. They have started to do market research and depend on these data for future planning, thus reducing chances of product failure.
The high liquidity of the market helped companies further. They had bargaining power over their lenders, thus reducing the interest rates. So, the financial costs came down. Even when the economy started to slow down, instead of investing in new activities, companies adopted financial engineering to further reduce costs.
The infrastructure of the country started to improve. Telecomm revolution made sure that almost all of India has a mobile phone. Transportation also improved with new ports and railway systems. Indian companies started eyeing foreign markets.
Then came the IT boom. IT outsourcing had reduced Indian current account deficit to low levels. The GDP growth for 2006-07 was a huge 9.4%. But, politically, NDA lost to the UPA. This was...