The Indian economy after many years of low growth and malfunctioning seems poised for a robust growth and overall development. Also, the economy has now fairly adjusted to reforms and most sectors are performing way above average. And, Yashwant Sinha’s millennium budget favours such conditions what with the external environment also improving and world GDP growth -- which had fallen from 4.2 per cent in 1997 to 2. 7 per cent in 1999 -- predicted by the IMF to move up to 3.5 per cent during 2000.

On the external front, the East Asian economies that were in the doldrums in the past two years are also showing signs of picking up. In fact, they are expected to fully recover by 2000-end. Exports from developing countries which is expected to grow at 6.2 per cent in this year will play a major role in world trade.A look at the past performance of the Indian economy shows that it was in 1993-97 that the economy performed the best with the average GDP growth at around 7 per cent. This was a fallout of finance minister Manmohan Singh’s reforms initiative where market barriers were removed and private investment encouraged. This was despite the government investments not taking an active part.

What went wrong
But this trend was shortlived. Why did the Indian economy start slipping into the red? Well, political instability resulted in the reforms process slowing down leading to investor confidence falling. To take control of the situation, the government had no other option but to announce a tight monetary policy -- interest rates started rising. Infrastructural bottlenecks got reflected in the sluggish industrial growth which was moving southwards. If agriculture had also failed,the country’s GDP growth would have been much less than the 6 per cent that clocked last year. On the trade front, exports dipped and the consumer price inflation (CPI) peaked at 13 per cent.

It was then a basic collapse of the entire reforms process. The recessionary conditions prevailing the worldover also got reflected in Indian industry which was facing a severe demand recession. The Indian industry had built up excess capacities, going on the assurance by the government that there would a pick up. But, this excess capacity started eating into their already thin margins.

Expensive finance
This drain in the economy saw government coffers getting empty and public investments -- which was supposed to rise -- falling. Private investments were also declined. Bank deposits started falling too, interest rates spiralled and overall finance to industry started becoming even more expensive. A major fallout was India’s competitiveness started declining. The country’s exports were also at their nadir on account of the demand recession prevalent in most of the world economies then. Exports fell drastically from about 20 per cent a year in 1993-96 to only 4. 5 per cent in 1997-98 to a negative 3.5 per cent in 1998-99. What have been the main causes for India’s exports not performing despite world demand picking up now? Poor infrastructure, high interest rates and high real exchange rates make the Indian products too expensive for the overseas buyers.

Deficient infrastructure
Infrastructure bottlenecks have been the biggest hurdle for India not achieving a high growth. Despite the government consciously spending crores of rupees every year, there seems to be no major improvements in the basic infrastructure of the country. Private investment in infrastructure is also inadequate.

Foreign investors are not comfortable working in a slack policy environment, where red tapism and procedural hurdles is rampant which cumulatively result in huge time and cost overruns. A sound policy mix would be welcome step to attract foreign investments to the country. What usually happens is that for instance if the government announces a liberal infrastructure policy it simultaneously announces a tight monetary policy. Now then, in such a case how does the investor get funds to invest in infrastructure if the interest rates are high? Infrastructure finance is usually very expensive and the projects have long gestation periods. How then do investors get back their basic investment proceeds?

Lack of integration
The Indian money markets are also not integrated and do not follow to a large extent the international norms. Hence, the domestic investors cannot tap the international finance markets for funds and lose out on the cheap interest rates prevailing overseas. They are then forced to rely on the expensive domestic fund resources which in turn increases the cost of the project.

The inflation factor
The prevailing inflation rate is another crucial factor in infrastructure development. The government has been trying to keep inflation levels low but it is an artificially monitored tool. Though the nominal inflation rate declined steadily this fiscal, it was still not comparable to the low inflation levels prevalent in competitor countries.

There was an appreciation in the real exchange rate compared to 1993. Between June 1997 and June 1999 the INR depreciated by about 15 per cent against the dollar. But comparatively this was much lesser than the Korean won which dipped 25 per cent, the Thai baht by 30 per cent, the Malaysian ringett by 35 per cent and the Chinese yuan by more than 70 per cent relative to the dollar during the same period.

Economy marching ahead
But today things are fast changing and the situation is reversing. Industrial recession is bottoming out, high inventory levels because of excess capacity are falling and the superlative agricultural performance last year is estimated to have pumped in Rs 91,000 crore of disposable income into the system for industrial products. Worldover demand is picking up and low inflation levels at home have improved demand for the domestic products which will fuel an export growth.

The Indian stockmarkets are also bullish. Most importantly, investors have shown confidence in the present BJP government which is committed to continue the reforms process. International stockmarket movements usually have their impact felt in the domestic bourses.

For instance, any crash in the Nasdaq gets reflected on the Indian bourses with the Indian stocks also witnessing a hammering down. But currently investor confidence is high which could spur a possible return of private investments into the country. Sound policies by the government will once again see foreign investments and savings flowing into the Indian stockmarkets. Portfolio investments which had slowed down is now picking up.

Need of the hour
But, the need of the hour is to more vigorously invite FDI into the country which is the root source for infrastructure financing but which is not happening at present. Today, the government has realised the potential in India’s software development sector and has provided maximum sops to this sector.

But, what the government should try and do is to see to it that earnings from this sector are invested in the domestic industry as this sector does not have many backward linkages income would remain and thus flow out of the country which can result in a near Asian crisis again wherein the other countries do not have the necessary infrastructure to absorb such large inflow of funds.

Plan of action
For attracting more private investments into infrastructure, the government should further reduce the interest rates and make them comparable with the international rates. Government policies should aim at cutting down non-essential public expenditure, lowering subsidies and raising revenues and prices of all public services. Controlling the growing fiscal deficit should be priority for all the governments.

There are then several hurdles that the Indian economy has overcome. It necessarily means moving away from past policies and taking harsh measures to improve the working environment of the economy. The government should try and improve its financial health in a more qualitative manner. Just cost controlling across the board is not the right solution.