The economy is expected to log an over 9% GDP growth rate in 2007-08, after a 9.4% growth rate in 2006-07 with inflation expected to dip to the low rates of developed economies like the US and Japan soon. The mid-year review of the economy released by the finance ministry on Friday, however, has identified excessive capital flows and spreading benefits of the growth rate among the poor as the key challenges for the economy.
The Indian economy now ranks fifth in contributing to the global growth rate, after the US, EU, China and Japan. ?The buoyant growth in the first half of the current year reaffirms continuation of the momentum,? survey says.
On inflation, it has said domestic commodity prices have become linked with international rates, which in turn would lower domestic prices to the low levels of developed countries.
The review has also claimed ?there is no one to one relation between (currency) appreciation and exports?. There could be sops for exporters in the short term but they have to improve productivity in the long term.
It has also endorsed the move towards capital account convertibility and making labour markets flexible, stating that these would make the economy more resilient to the impact of currency appreciation. The review tabled in Parliament has also suggested a fresh look at subsidies, replacing the current system with cash transfers and adoption of smart card technology to reach the benefits to the poor.
On capital markets, the review says the interest differentials between the domestic and foreign markets will persist and has to be managed along with large capital flows. Foreign investors have pumped in more than $16 billion into the Indian market so far this year. The flood of inflows has resulted in rupee appreciating by almost 12% against the dollar in last one year.
?The problem of plentiful capital inflows is an ?inexorable part? of the process of successful capital account liberalisation and has to be managed actively in the context of likely persistence of positive macroeconomic fundamentals, and prevailing interest rate differential,? the review adds. There has to be innovative responses to the problem.
?While there are international experiences in this regard, the specific Indian context requires innovative policy responses. Going forward this would be a major challenge,? the review notes. It has also said the perceived slowdown in parts of the industrial sector has been more of a statistical aberration that a review of the IIP figures would correct.
