The Hindu Business Line : Cautious optimism

When the Prime Minster’s Economic Advisory Council last reviewed the economy in July 2007 it pegged growth for the year at 8-9 per cent; this January, the EAC feels 2007-08 will end closer to 9 per cent. But for the next year, it shaves off half a percentage point on the basis of domestic and global developments over the past few months. The overall sentiment is cautiously optimistic; despite the current churn in the developed financial markets and the spike in oil p rices, the economy will sustain yet another year of over 8 per cent. The report acknowledges a fact seldom recognised by officials — that the projected growth represents a deceleration from the previous quarters, especially in 2006-07, when the economy peaked at 10.6 per cent in the second quarter. Having noted this trend, the EAC abandons it. By doing so, it underestimates the problems facing the economy and probably undermines the importance of policy to sustain growth into the next year.

Inflation is, of course, the main problem any growing economy faces. The EAC admits that, at less than 4 per cent, headline inflation seems normal but an added woe are the trends in global inflation, with oil, food, industrial raw materials and grain prices affecting even the developed economies. The EAC does not see much respite in prices, unless demand falls or supply constraints ease. The world, it believes, will learn to live with high oil prices. Will the buoyant Indian economy, confronted with perennial “supply constraints”, learn to do so without suffering its worst consequences? And what about capital inflows? If the US Fed cuts rates, more funds will flow in and the EAC offers no alternatives to the RBI’s costly sterilisation that is needed to keep inflation and the rupee in check.

The EAC glosses over the US sub-prime crisis, predicting a modest slowdown and some reduction in exports. Domestic resilience makes India less vulnerable than China to a US meltdown, it points out. Gross fixed investments, as a proportion of GDP, have increased every year since 2003-04, and the EAC expects them to touch 30.5 per cent in 2007-08. Such healthy signs may be neutralised by problems such as power supply or indirect tax reform, the policy need for which the Council does not stress strongly enough. The EAC urges decisive action on fuel prices and fertilisers, whereas a whole host of reforms, such as land acquisition or the legislative framework, also need looking into. That is a pity; the EAC report could have been a curtain-raiser for the coming year’s policy initiatives.

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