The economy has had it so good only a few times in the past; but the Government should guard against complacency and errors of judgement.
As the first six months of this financial year come to an end, it is useful to take stock of the economic situation. All things considered, it is quite satisfactory. Overall, growth is likely to be around 8.5 per cent. The monsoon has behaved, which means that the kharif crop is fine, although for some crops, such as rice and edible oils, more was hoped for from it. This is crucial for inflationary expectations as the rise in prices which was in full bloom for almost 30 months has started to abate only recently. Food inflation continues to be high but that is partly because high growth in a poor country raises incomes and, therefore, the demand for food. The trade deficit is high for the same reason, namely, that India produces less than it needs to keep the growth in industrial output up. This latter has been behaving erratically but much of that volatility can be traced back to accounting practices, especially in capital goods. The demand for consumer non-durables has been sluggish but will probably revive when the income from the kharif crop reaches farmers. Consumer durables are doing very well. Bank credit is expanding at a reasonable pace of about 20 per cent. It could be more, of course, but not by much because of the asset bubbles that appear to be developing in both the real estate and the stock markets.
However, rising interest rates are a dampener on investment. Capital inflows remain buoyant but have not become a flood that would create absorption problems. So the current account deficit, which could go to 3 per cent by the end of this financial year, is also not a worry. Exports could be better but that can always be said about exports; it is also important to note that lower growth in exports does not necessarily mean lower profit margins for exporters. Indeed, they should complain less. Forex reserves, at around $300 billion, are adequate to meet all contingencies, except sudden and massive outflows of the type seen in September-December 1990. Thanks to the spectrum auctions and some carefully chosen disinvestment, Government revenues are also not under very great strain and, hopefully, with some sensible expenditure management, the fiscal deficit can be reduced to a manageable 5 per cent or so. Its borrowing programme for the rest of this year is also not a problem. Reform, both of direct and indirect taxes, is on course.
The economy has had it so good only three or four times in the past — and this could be the greatest cause for concern because such a confluence of favourable factors not only induces complacency and the consequent errors of judgement but also becomes an invitation to bad luck. India's good years in the past have always been succeeded by a series of bad ones, which is what the Government needs to watch out for.
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