Economy: Some concerns, some optimism

The economy to cross the $1 trillion GDP mark during FY08


( http://www.rediff.com/money/2008/feb/28ecosur23.htm)

Inflation: it is expected to be around the 4.4% in FY08

"With the full effects of the economic reforms of the 1990s working through the system, the Indian economy has moved to a higher growth path.

The new challenge is to maintain growth at these levels, not to speak of raising it further to double-digit levels. With domestic experience of such high growth limited, global experience can be useful. Historically, there have been about a dozen medium/large countries that have averaged a GDP growth of 9% or more for a decade. Of these, less than half maintained an average growth of 9% or more for two decades. The challenges of high growth have become more complex because of increased globalisation of the world economy and the growing influence of global developments, economic as well as non-economic.

Even the economic survey has taken note of this fact and has maintained that managing foreign capital inflows (alongwith inflation) is one of the key challenges that Indian policymakers will have to face in sustaining economic growth at high levels in the future. It is a given that high GDP growth attracts foreign capital looking for profitable investment opportunities. We believe that in a positive cycle, this inflow will indeed find profitable investment opportunities that others have missed and lead to even higher growth.

However, if the growth opportunities do not materialise fast enough, there is pressure on the currency to appreciate, resulting in either an accumulation of reserves (followed by monetary expansion and inflation) or actual appreciation or both. In the last two years, particularly in FY08, the Indian economy has gone through such a phase. And there are reasons to believe that the surge in capital inflows, including foreign direct investment (FDI), will continue in the medium term, possibly intensifying the headache for the RBI.

Another factor that could constrain Indian economic growth in the future is the country's poor physical infrastructure. Despite efforts to accelerate the pace of infrastructure development, the demand for infrastructure services has grown even faster than the supply so that the constraints may have become more binding.

Thus, there is a heightened urgency to augment and upgrade infrastructure, both physical as well as social and, in particular, power, roads and ports. This shall require mobilisation of unprecedented amounts of capital with macroeconomic stability, which can only happen if both the public and private sectors have the incentive and the motivation to perform at their best.
All in all, the key issues confronting India today are: the sustainability of high growth with moderate inflation, and the inclusive nature of such high growth. The inclusive nature of the growth itself will be conditioned by the progress that is made in the areas of education, health and physical infrastructure.

For this, the government needs to rise to the challenge of maintaining and managing high growth, bolster growth through fiscal prudence and high investment and improve the effectiveness of its intervention in critical areas such as education, health and support for the needy. Only then will the growth path's trajectory will be maintained in the higher single digits or even double-digits".

(equitymaster: economic survey 08FY)