The Hindu Business Line : Beware the boom

India is currently going through the twin boom — of stock and commodity markets. Though rare, the phenomenon is known to occur when an economy is in expansionary phase. Even as the booming markets spell euphoria for a large number of stakeholders, there is need for caution, as highlighted first by the Finance Minister and then by the Prime Minister recently. Global imbalances caused by soaring energy prices and skewed trade balances of major countries can have an unsettling effect on the global economy and decelerate growth worldwide. India cannot escape the consequences. With the gradual integration of the domestic market with the world global market, the country is no more insulated from outside influences.

Currently, not just domestic but international factors also affect prices. Much of the inflation is actually `imported'; internally, it is under reasonable control. Rising dependence on commodity imports at higher prices, primarily of crude, and increasingly of several others, including food products, will sooner rather than later get reflected in prices. Whether energy products, base metals, industrial goods or even agricultural commodities, markets around the world are spiking at a pace not seen in recent years. The commodity boom is clearly a combination of sharp demand expansion and continuing supply constraints, on the one hand, and the huge flow of speculative funds, on the other. A downside risk is inherent in such markets. How long the boom will last and what impact the continuing high commodity prices will have on the world's major economies are tough to predict. But the Indian economy is more vulnerable to domestic imbalances than global ones. The latter are likely to affect India less severely than internal imbalances themselves mainly because India is still not as export-driven as many other economies. It is, therefore, crucial that policymakers address issues that can cause or accelerate domestic imbalances.

Two vulnerable areas need urgent attention: Infrastructure development and drought-proofing the economy. Both need huge investments. The Government will have to design investor-friendly growth-oriented policies with a long-term perspective to attract large funds for infrastructure development so as to infuse the manufacturing sector with competitiveness. Public-Private Partnership is a way forward, but is stymied by lack of conceptual clarity and policy ambivalence. As for drought-proofing the economy, there is no alternative to strengthening agriculture. It would be naïve to believe that imports can meet domestic food shortages. Imports are a facile option and should be used as a short-term measure. Needed are policies that generate employment and thereby incomes in the rural areas. Two successive seasons of drought and crude prices at $100 a barrel can stop the soaring Sensex in its tracks and pull it down to four digits.

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