Ride the upswing

The upswing in the investment cycle is good news for the economy. The gloom and doom of May 17, when the markets seemed convinced that the economy was going to collapse, is now fully dissipated. There has not only been a revival in the stock market, but business confidence has improved enough for a large number of new investment projects to be announced and for an unprecedented number of old projects to be revived. The damage caused by the irresponsible statements of the Left leaders and the fears created by the fact that the government was being supported by precisely such leaders, have been allayed with no major reversal of the reform process. While debates on FDI and disinvestment continue, the opportunity costs of not going ahead on them is clearly not large enough to deter industry from nursing high expectations about growth 8212; the decisive force that propels investment.

The revival in investment is not unexpected. The economy was clearly on the upswing of a business cycle by end 2003-04. Signs of the upswing were visible before the UPA government took charge. A sharp rise in corporate sales, profits, industrial activity, exports and imports, were there for all to see. The only fear was that if government gave wrong signals, the incipient recovery would disappear. The strategy of bringing in a strong, tried and tested reformist team of economists at the helm of affairs seems to have done the trick. Given the nature of the government and the dependence on the Left, creating a climate for growth would not have been easy with a different team.

Manmohan Singh and Chidambaram may have won the first round, but it8217;s not enough. Economic policy must continue to create a conducive environment for investment. While big ticket reforms like privatisation may not be on the front burner, the government must go ahead with the large number of small, critical changes required to make India into a single national market and remove obstacles to growth. It is important that the impact of rising investment be maximised. We must ensure that the investment upswing continues.