It can truly be said that this Diwali has gone off with a bang. Reforms may have been jolted if not ‘gilted’ (pun intended) but the Indian economy is cruising unperturbed. Even the more cautious projections for the following fiscal year expects a GDP growth of around 8.7 per cent, coupled with healthy macro-fundamentals, subdued inflation and unprecedented interest of foreign investors. In this sense, policy constraints do not appear crippling. Of course, continued external flows are pushing the rupee to levels beyond the ingenuity of our exporters. Similarly, even if the consumer price index reflects much higher inflation for food-grains, pulses and edible oil, the continued revenue buoyancy enables accommodation of open-ended subsidies for the public distribution system without hurting fiscal commitments. And efforts to improve infrastructure, particularly Bharat Nirman, may begin to pay off.The warnings issued by the newly appointed IMF chief, Dominique Strauss Kahn, that any efforts to curb capital flows “could undermine confidence in the country’s very brilliant economy with consequences beyond India. and that it will have an influence on capital flows but always not a good influence” is maybe too much of gratuitous, almost unsolicited, advice. The advice has come within days of the new managing director assuming office and does not reflect in-depth understanding of the complex dynamics of our policy-making process. The Indian regulators have adopted a cautious but balanced approach in combining the traditional instruments of sterilisation, encouraging capital outflows and seeking limited curbs on capital flows by seeking greater transparency at a time when trade and widening interest rate differentials encourage large arbitrage. The authorities have made it clear that there are no proposals to bring any formal capital controls, and the IMF appears needlessly concerned.Dominique Strauss Kahn has other more serious problems on hand, including the rediscovery of the relevance of the fund. Mere tinkering with voting rights will not address a more basic shift in the balance of economic power in favour of some emerging markets, particularly in Asia. Let the fund come to term with its own identity crisis. So, what is our immediate concern? First, managing large capital outflows, exchange rates and interest rates at a time when excessive burden has been placed on the monetary policy. The prime minister rightly observed that any significant slowdown in our exports will hurt GDP growth and labour-intensive employment, given the now significant contribution of exports to GDP. Of course, if the US economy goes into a recession with a wider contagion effect, the hurt could be deeper through shrinking market access and an uncompetitive exchange rate.Second, apart from a possible global slowdown, there are exogenous risks like sustained high prices of crude and uncertain expectations. The volatile conditions in West Asia and unsettled conditions in the countries in our neighbourhood are worrisome. The consequences of a pass-through of real cost of energy to consumers, apart from inflationary consequences, would induce a rejig in patterns of economic activity with increasing evidence that the spurt in energy prices is structural and not cyclical. Third, nobody expects a government that is in a holding mode to undertake new initiatives. However, speeding up the implementation of energy initiatives can make a qualitative difference. Leaving spectrum-related issues unresolved can hurt the growth of teledensity. Similarly, the tardy pace of building the Golden Quadrilateral and other National Highway projects upsets the time-bound improvement in infrastructure. It does not help that compulsions of coalition politics have resulted in frequent changes of key personnel engaged in the road development programme. Similarly, energy related issues including coal reforms, inter se fuel pricing and coherent implementation of an integrated energy policy can make a difference.Presumably, the new initiatives in the education sector will not encounter further inter-ministerial conflicts and bureaucratic hurdles. Reforming education needs a mindset change, both on part of the Centre and the states. Many describe the present hassles in securing the multiplicity of permissions for setting up educational institutes as reflecting the worst vestiges of the discredited licence permit raj. Fourth, as we get closer to elections, populist measures will inevitably multiply. This will compound the expenditure concerns in the budget-making process. Besides the large un-funded contingent liabilities on account of large under-recoveries in the oil sector, the unpaid fertiliser subsidy bill, the likely increase in food subsidies on account of large increase in minimum support price not reflected in the issue price, not to speak of the unforeseen liabilities from the recommendations of the Sixth Pay Commission, will all add to our woes. Assuming the present pace of revenue buoyancy may not be prudent while the gains from improved tax administration are far from over, but even the growing envelope may not be large enough to absorb new and large expenditure proposals which may be in the offing. Diwali 2007 marked a high point in our prosperity. To continue the present euphoria in the coming years needs dexterity in handling emerging challenges at a time of growing political uncertainties.
