Economic Outlook 2008

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The year 2007 will gladden the hearts of economic policy makers. The year ends on a high note of continued economic buoyancy, daunting GDP indicators, modest inflation, and India remaining a favourite destination in the boardrooms of multinational companies. It is legitimate that the current policy managers take credit for these many favourable outcomes. It is another matter that many view the current growth to be on auto pilot. Mumbai is believed to have decoupled from Delhi and there is palpable absence of significant policy initiatives. The comment that why tamper when things are going well suggests complacency and can at best be comforting in the short term.

So how do we sustain this trend in 2008?

First and foremost, a reassertion of Prime Ministerial authority. There is a growing perception both nationally and internationally, of a weakening of the Prime Ministerial writ on coalition partners, many of whom have increasingly begun to believe and behave as if they were governments in themselves. The tardiness in the award of contracts for the prestigious road projects or the mess in the decision making on spectrum allocation are anecdotal examples. Given his unimpeachable integrity a reassertion of Prime Ministerial authority could qualitatively alter perceptions and improve governance quality.

Second, a continuation of strong macro fundamentals. Compliance to the quantitative targets under the FRBM Act may have been achieved but as is well known there are significant under recoveries from the petroleum sector. There is also under provisioning for the fertilizers subsidy. Besides, the food subsidy bill will continue to rise. The inevitable impact of these on consumers need to be gradually calibrated notwithstanding its inevitable fiscal and inflationary implications, to avoid a land landing. Looking at global shortfalls in food production due to unfavourable climate and land diversion to bio-fuels, international food prices in the medium term may remain high and protecting the poor would entail rising subsidy bills. The revamping of Public Distribution System thus assumes urgency.

Similarly, managing the exchange rate which does not further cripple export competitiveness without excessive restrictions on capital inflows or access to cheaper borrowings by medium and smaller enterprises, while minimising losses from unabated sterilisation, remains a difficult balancing act.