Just so people give credit (where it's due?), India's caretaker finance minister emerged last week to make a number of statements highlighting the strengths of the economy. He was optimistic "this revival will hold and we will go forward from here" but at the same time, laid the ground for a higher fiscal deficit arising from increased defense costs. Current data across a broad range of parameters have added credibility to his statements. For example:

** Provisional WPI-based inflation rate fell to 2.03 per cent for the week ending June 26 '99, the lowest since the current indexwas introduced in 1980-81.

** The Index of Industrial production soared 6.3 per cent in April-May '99 over the corresponding period in 1998 (the highest in 16 months).

** The winter Rabi wheat crop has been a bumper 71 million tonnes. Stocks are at a record high. With an 11th successive normal monsoon, expectations are for a kharif crop of 108.4 million tonnes (increase of 5.75 per cent over last year).

** Exports grew 6 per cent in the April-May '99 as against a 4 per cent decline recorded in 1998-99. Imports were 3.8 per cent lower and would have been much lower were it not for oil prices.

** Tax revenues in April-June '99 increased 17.3 per cent (over corresponding period in 1998), led primarily by a 20.9 per cent increase in indirect tax collections, especially excise duties.

** Forex reserves remain at over US$ 33 billion and the rupee has been stable over the past nine months accompanied with falling forward premia.

** Foreign portfolio investments have crossed US $1.1 billion since January1, 1999, a quarter of it in July alone.

Booming stock prices have contributed to a sense that all is well. It is however foolhardy to be lulled into complacency based on the Sensex (the Bombay Stock Exchange Index) movements. Indian markets are just keeping pace with stock exchanges the world over. Asian markets have recovered sharply in the past 12 months, even as The US Dow Jones Industrial Average, the UK's FTSE index, Australia's All Ordinaries Index and Singapore's Strait Times Index have all hit record highs. Revival in international commodity prices in sectors such as petrochemicals and steel are also benefiting local majors. Reasons for Indian stock gains also include tax sops given to mutual funds and on long term capital gains, restructuring of the US64 scheme (India's largest fund) and due to reduction in floating stock caused by conversions of physical to dematerialised stocks. Corporate profits as yet show only a mixed trend.

When can we be sure that the recovery is truly underway? Currentgrowth is no doubt exaggerated by the low base of prior years. What is required is a continuance of these growth trends, i.e. sustainability over the next 2-3 quarters. Consumer spending needs to extend beyond TV purchases occasioned by the cricket World Cup and automobile sales boosted by new models. Capital investment too remains focussed on specific infrastructure areas supported by foreign direct investment. Local investment is not yet forthcoming. The lifting of sanctions by the US government on June 8 will help as will the accommodative monetary policy of the central bank.

We have been in this position before. It was but a year back that the economy was on a similar growth path. The nuclear tests in May '98 left the country with a strong national identity but pulled the rug from nascent economic growh.US-led sanctions, the Russian crisis and pressure on the forex front combined to create a highly uncertain environment. The Reserve Bank of India (RBI) ramped up its benchmark Repo rate from 5 per centin June to 8 per cent by August '98. WPI-based inflation shot up to 8 per cent and consumer inflation was measured at record 19.7 per cent in November '98. Higher interest rates depressed industrial activity and sentiment was probably at its poorest.

Fortunately this time, the Kargil conflict was confined and resolved quickly. It has not created discontinuity in industrial activity. The costs of war (estimated at between Rs 25 billion for 50 days @ Rs 500 million per day) will push up the revenue deficit. The centre's fiscal deficit has already increased sharply in April-May '99 at Rs.220 billion (higher than corresponding period PY). The gap may narrow because of strong revenue collections and may also be partly met through additional taxation. In any case, the targeted revenue and fiscal deficit targets of 2 per cent and 4 per cent, respectively are likely to be exceeded. GDP is still expected to grow at over 7 per cent.

Risks to growth continue to exist. India's credit rating remains at junk bondequivalent. In the external sector, the global financial crisis is not yet behind us. Its potential of coming to Asia and causing either a reversal in the commodity cycle uptrend or a Chinese devaluation remains high. Both affect India. Internally, the elections in September are the greatest cause of uncertainty. India's previous experience with coalition politics has not been good and growth is predicted on a continuation of politically sensitive structural reforms. On the economic front, growth will put pressure on the balance of payments (BOP) as imports surge and on interest rates as private sector demand for credit increases. These require deft management.

The government should continue its current easy money policy. A pickup in credit growth could be accommodated through a CRR cut in the October credit policy. On the BOP front it is hoped that surpluses in the capital account will offset deficits in the current account. At present, Foreign Direct Investment in India at $3 billion is less than 10 percent of China's $45 billion and a measly 1.2 per cent of the total flow to developing countries. Structural reforms and `economy' need to remain insulated from the vagaries of politics. All parties were enthusiastic in evolving a political consensus for passing the budget. Hopefully even if the election results are inconclusive, the same trend towards evolving a consensus for broad economic policies and reforms continues.

(The author is the head of treasury marketing of a leading foreign bank. The views expressed are his own)