But NCAER's good news is not without blemishes. Evidence of new investment,it says, is lacking save in the new economy. The business confidence indexhas lost its verve. Add to this the uncertain prospects in the financialsector. With improved tax collections in Q1, it is widely assumed thatfiscal pressures will be within a manageable limit. But NCAER sees a rise ingovernment expenditure in the wake of high oil import prices. It also talksof hardening interest rates abroad and of the appreciating dollar (vis-a-viskey convertible currencies). So, it gently points to the difficulty oflowering domestic interest rates. It might have added that domestic interestrates are actually slated to rise.

The current inflation rate in the economy is around 6 per cent. Two-thirdsof this is the result of upping domestic oil prices late last year. It isthus argued that by December the y-o-y inflation rate will fall. Once thathappens the core rate of inflation (effect of non-administered pricechanges) will come into its own. The reckoning is that inflation will closethe current fiscal at 5 per cent. (NCAER merely says it will be more thanlast year's 3 per cent.) But the continuing high oil prices abroad require ahike in domestic oil prices (as underscored by NCAER). Factor in the cost ofoil in depreciated rupees, and it will be seen that the correction requiredwill be stiffer than, say 7 per cent.

The likely course of inflation, and its impact on demand (a rise inexpenditure on fuel leads to a corresponding decline in the growth ofexpenditure on other items) has received less than due attention in theassessment of economic prospects.

For demand-driven investment, hardening interest and inflation prospects arebad news. The expectation that government investment will rise (to prop upaggregate investment) this year has been somewhat frayed by NCAER'sprognosis of a rise in fiscal pressures: that will require expenditureeconomies; but the trouble is that economy-drives axe capital expenditure.

Thus, NCAER's argument for larger foreign direct investment (FDI) andincreased external commercial borrowings (ECB) for stepping up aggregateinvestment is apposite. But FDI remains coy; against the annual target of$10 billion, just $2.2 billion came in last year. FDI could make adifference to investment expansion. But this is not happening. Besides,NCAER points to the sizable (post-reform) FDI in equity of existingcompanies with an eye on mainly the domestic market; such FDI has notcontributed to export-orientation. As regards the ECB route to investmentexpansion, this is riddled with potholes of rupee depreciation which raisethe cost of debt. Corporates, still restructuring and consolidating, arehardly likely to rush into ECBs.

In sum, the high GDP growth scenario though encouraging also contains manyfaults, all identified but left uncorrected. The economy rides on goodmonsoons, growth in services and high exports, for now.