The 9 per cent mantra

GDP growth of 9 per cent in 2007-08 is some good news after a long time. Media hype created by watching inflation numbers week after week has been acting as pressure on the government to take immediate action. Therefore, the news that at least growth has not suffered is welcome. It is important at this time to make sure that the news on inflation does not become a reason to panic and take actions that could make growth lose momentum. Also, it is important to remember that the Indian growth story has not emerged from a state-led investment plan. It has emerged from a growing and aspiring middle class which has seen rising income and consumption in the last few years when India got rid of the licence and control raj. The aspirations of this class and economic liberalisation are an essential part of the story. The high growth seen in the last few years has brought employment and income to the poor and reduced poverty in the country.

This story must not be reversed by either going back to the command and control economy, or repressing the financial system with measures such as stopping companies from borrowing from abroad and forcing banks to put their money with the RBI and in government bonds. Any further CRR hikes must be avoided. They will deprive the industry of credit and could potentially put an end to the growth story. Further, rationing and any banning of markets must also be avoided. They will only increase distortions in the economy, and reduce the confidence of investors and pull down growth.

One concern in the present scenario is the price of oil. The price of oil on the international market is still rising. This is happening for a number of reasons, including the fact that India and China are not raising domestic oil prices. Rupee depreciation at a time when inflation is high will only push prices up. A stronger rupee can help. Getting rid of capital controls and avoiding steps to kill high growth in India will help bring back international capital into India; that will help prevent the rupee from weakening. However, for the sake of both the health of the oil sector as well as the fiscal situation, the government must raise the price of oil. While a part of the pain can be reduced by a stronger rupee, it is necessary to raise domestic prices to induce a demand reduction. We cannot keep domestic prices at the level when the global price of oil was half of what it is today. A well thought out macroeconomic policy, instead of knee-jerk reactions, is vital for sustaining India8217;s growth.