Tuesday, April 22, 2008

India's economy flying high, amid clouds

The Business Times 28/02/2007

THE Annual Economic Survey (2006/07) for India, released yesterday by the Indian government tells a remarkably upbeat, though not unblemished, story - which also contains hints as to what might be forthcoming in the country's budget, to be announced today.

The Indian economy has had perhaps its best year since the nation's independence in 1947. In 2006/07 (ending March 31, 2007), India's GDP growth is set to come in at 9.2 per cent. The fiscal deficit has been cut to 3.8 per cent of GDP thanks mainly to buoyant tax revenues. The investment rate is running at about one-third of GDP - suggesting that high growth will be sustained. Export growth for the first nine months of FY06/07 was a stunning 36.3 per cent. Net inflows of foreign direct investment (April to September 2006) were up more than 98 per cent, and foreign exchange reserves are at a record of more than US$185 billion.

If there were any lingering suspicions that the Indian economy's stellar growth performance of recent years might be a flash in the pan, these should now be buried once and for all. As the survey points out 'the economy appears to have decidedly taken off and moved from a phase of moderate growth to a new phase of high growth'.

However, as one might expect for any huge, low-income country, there are enormous development challenges ahead - most of all, tackling mass poverty, which remains a serious, though diminishing, problem. But right now, the flashing red light on Indian policymakers' radar screens is inflation, a particularly sensitive issue that has been known to even bring down governments. Wholesale price inflation is now running at around 6.6 per cent, well above the the Reserve Bank of India's comfort level of under 5.5 per cent. India's Congress party-led government, which faces seven state elections this year, is understandably concerned.

The Economic Survey debunks the idea that India's growth needs to be slowed down to deal with inflation; quite rightly, it suggests that the problem lies in removing supply-side bottlenecks, especially in the rural sector, which is also lagging behind. While India's central bank is doing its part to tackle inflation by draining reserves from the banking system (it has twice in two months raised the amount of cash banks must set aside to cover deposits), this is clearly not enough. Fiscal policy too needs to be supportive - as well as inclusive in the Indian context. Today's budget is likely to have a strong anti-inflationary and pro-rural bias: cuts in customs duties rather than income taxes; reductions in some fuel surcharges; heavy spending to boost the supply side of the economy - particularly in the rural sector - which would include massive hikes in spending on infrastructure and irrigation, as well as on health and education.

The signs are that India's budget today is unlikely to be brimming with tax breaks for the private sector, including foreign investors. Nevertheless, it will almost certainly be pro-growth, designed to keep the Indian economy flying high. That should give business some cause for cheer.

  1. Explain how the indicators show that the Indian economy has done well.
  2. Explain why inflation might be a concern to the Indian government.
  3. Explain and evaluate the measures that could be taken to address the problems faced by India at this time.


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