India - fall of Asian lion from high to low growth in 2012

India opened its economy in 1991 and its growth rate picked up from near 4% to near 9 % during beginning of the decade (2001-10). However by the time it reached 2012 the GDP growth rate fell to 5% approximately.  The paper attempts to explore the causes for fall in economy.  The methodologies include multiple regression of detrended series, Granger causality test and panel regression. There is no doubt that world economic recession had impact on the fall in growth, but it has further been catalysed by issues like inflation, money supply and  monetary-fiscal integration issues.   It confirms government expenditure not only increases GDP but also money supply.  Falling growth rate will certainly impact GINI index or distribution of income. Low growth rate accompanied by high inflation of 10% will make rich richer and poor poorer. Changes in inequality (in any direction) are associated with reduced growth in the next period. Banking Sector’s credit to the Government; Banking Sector’s credit to Commercial Sector and net foreign exchange is significant to increase money supply. There is multi-collinearity in the system; there is a high correlation between M₁ and credit to Commercial Sector, but least correlation between the net foreign exchange and Banking sector’s Credit to the Government. Further, increased demand for a currency is either due to increased transaction demand for money, or increased speculative demand for money. The transaction demand for money is highly correlated to the country’s level of business activity, GDP and employment levels. Capital inflows have been associated with increased investment and stock market activity, and rising GDP, and have resulted in a buildup of inflationary pressures. Further the correlation between the money supply and exchange rates (rupees per unit of US dollar, pound sterling and SDR) is very strong. FDI approval on completed projects will further put pressure on money supply and then inflation. It is expected that growth rate will come to level of pre globalisation period.