The Hindu Business Line : Tasks for the year ahead

The significant progress made by the economy over the last year shows it is on the right track and that the reforms have worked in substantial measure. The year 2007 will, however, inherit some inflationary pressures, which must be tackled. Equally important, the authorities must eschew mindless opposition to FDI in certain sectors, says S. VENKITARAMANAN.

India's economy has registered significant progress in the year gone by. The latest Review of the Economy published by the Finance Ministry shows that the rate of growth was maintained at 9.1 per cent for the first half of the year. There has been a mild acceleration of the year-on-year growth — 8.9 per cent in the first quarter to 9.2 per cent in the second. This shows that the economy is on the right track and that the reforms have worked in substantial measure, as expected by their progenitor, Dr Manmohan Singh.

Particularly important is the growth of the manufacturing sector, whose performance has been robust in the year gone by. Output of capital goods is an indicator of the investment demand and business confidence. The Mid-Year Review shows that capital growth surpassed manufacturing growth in 29 of the 30 months since April 2004. This is a good augury for continuing growth in the economy. Agricultural growth, however, has remained subdued, averaging just 2.6 per cent in the last eight quarters. The growth of foodgrains production between 1996 and 2006 was just 0.22 per cent per annum. Negative growth was observed in rabi foodgrains production, particularly wheat and pulses. This is an alarming signal, which has to be taken note of and corrective steps taken by the policy-makers.

It has been noticed by many observers that the services sector continues to grow at a healthy pace. The Review shows that it grew at 10.7 per cent in the first half of this fiscal. The overall growth of the services sector in the 10 quarters averages about 10 per cent. All this goes to show that while the economy has some problems, on the whole, it is characterised by the robust growth. One can safely assume that the Finance Ministry and the Prime Minister will take the necessary steps to set right the imbalances shown by the tardy growth of agriculture, especially the poor rate of increase in supply of foodgrains, which has repercussions for food security.

Inflationary pressures

The year 2007 will inherit inflationary pressures, which have been primarily on account of increase in prices of primary commodities. The point-to-point inflation rate measured in terms of Wholesale Price Index reached a peak of 5.5 per cent in mid-June 2006.

The overall WPI inflation still continues, notwithstanding the decline in crude oil prices on the international scene. Inflation continues to be a matter of concern for the authorities, especially because our tolerance level for inflation is low. The current statistics show that unless serious steps are taken to rectify supply/demand imbalances, inflationary pressures will continue.

Unfortunately, the authorities in North Block and Mint Street are still arguing among themselves whether monetary measures can bring inflation under control.

While this is neither the time nor the place to enter into an ideological dispute, it is obvious that both monetary authorities and the Government will have to work together to evolve and implement policies on both the demand and the supply sides — the supply side being important in the context of the scarcity on the foodgrains front.

In spite of the negative spots in respect of inflation, the overall picture is optimistic.

The continuing good performance of the Indian economy has attracted the attention of investors all over the world. This has led to substantial FII inflows and an increase of liquidity which, in turn, has been reflected in a stock market boom.

Mindset change

If the Government does not commit any errors of policy in the shape of political missteps, it can be confidently asserted that the year 2007 will continue to be a year of good performance of the economy as well as the stock market. The Sensex will continue to ride the high levels it has seen so far.

One note of caution for the Leftist nationalists. The Indian corporates are expanding into the international market and setting new records by acquiring major concerns in developed economies. This trend is likely to continue.

By the same token, Indian politicos will have to learn to accept that foreign corporates do also have a similar right to participate in the Indian market.

The mindlessness of the opposition to FDI in select sectors will have to be given a conscious reappraisal by the Left in view of the fact that India's corporates have come of age.

Reciprocity will be expected by the political elite of developed countries, who face the likes of Tatas and Reliance engaging in acquisition in their own countries.

In spite of all the good signs, there is a continuing problem that growth patterns in India have, by and large, delivered unattractive prospects for the jobless.

This is because of the structure of the growth, which has concentrated in service sector and not in the manufacturing, which can employ the unskilled also.

It is to be hoped that the Planning Commission and the Centre will implement policies to reverse the trend and increase the emphasis on manufacturing and agriculture. The year 2007 will be not only a year of growth of GDP but also of jobs. This is my hope for the year 2007.

May the planners, the Government and the RBI work in partnership with India's private sector to ensure that GDP growth translates itself into jobs, financial stability and food security!