The Hindu Business Line : Wooing the world

That the external sector has been a robust indicator of the country's economic upsurge is once again upheld by the latest Reserve Bank of India figures. Preliminary data for January-March 2006 confirm the buoyancy in merchandise exports which grew by 23 per cent compared to 20 per cent a year ago. Import payments slowed considerably though oil imports inched up because of a dip in non-oil imports compared to the same period the previous year. The rise in receipts from invisibles — earnings from professional services, remittances and the like — coupled with modest import payouts led to a surplus on current account for the quarter. In the capital account, robust growth in capital inflows, external commercial borrowings and foreign direct investments reflected a strong global outlook for the Indian economy.

The data for the quarter are of a piece with a maturing economy that is getting used to motoring along without helpful boosts from policy interventions. Global fuel prices shot up after March; till May the stock market witnessed a tidal flow of capital; more pertinently, inflation remained under control and, therefore, kept Indian exports competitive. With very little policy intervention, the organised, urban economy did remarkably well in services and manufacturing despite sluggish growth in core sectors; separate data on external commercial borrowings by Indian companies attest to the high level of confidence reposed in the economy by global lenders. That remittances witnessed record growth the last two years suggests more than just the globalisation of Indian manpower; it is a testimony to the confidence of the service provider to plough the funds back into the domestic financial loop. The news can easily get better if policy-makers intervene decisively in critical areas.

Exogenous factors are already making that intervention imperative. Inflation has crossed five per cent and will breach all official estimates soon as fuel and food price hikes get factored in. If the Reserve Bank of India is forced into periodic interest rate hikes, the cost of exports may rise and blunt India's competitive edge. While monetary and fiscal planning may help, interest rate spikes stifle investments in new areas. The best option is to expand the limits of current growth by making sectors with potential demand attractive to domestic and global capital. Q4 data show a spurt in foreign direct investment from the previous period but the scale has to be upped dramatically. Recently, the Prime Minister spoke of private investments in infrastructure but nothing much seems to have moved. Policy-makers must capitalise on the global sentiment that is strongly favourable to India and kickstart growth in sectors that have contributed precious little to growth in GDP so far. It is high time New Delhi did more to attract foreign investments in physical infrastructure, energy and mining, all of which are more critical sectors than real estate.

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