Of course we don’t know. However Kapur and Subramaniam make a good case for “probably not so bad.”
Maybe so, but here is my worry. Within the span of about a year, India has gone from eight percent plus growth to the range of four to five percent, and perhaps with further downward momentum. That is a big shift. And that has happened without any initiating financial crisis, without any war or natural disaster, without any collapse in aggregate demand, and without any price collapse of a primary export product. It just happened.
It could be the Indian economy bumped up against a hard energy constraint; Indian energy policy is notoriously inefficient. Still, it is unlikely that is the whole story or even half of it.
One has to wonder whether India is an economy moving across multiple equilibra (note to self: FN Roger Farmer), and the passage of time has been revealing that India “deserves” increasingly inferior expectations about future economic performance. When it comes to multiple equilibria, there may be more than two. India’s very response to the current crisis will determine which equilibrium comes next and that is not altogether reassuring.
Non-linear effects seem to be in the running here, so India’s crisis could be worse than the brute statistics alone (or an IS-LM model) would indicate.