Ensure economy is not overheated

Updated: Dec 31 2006, 07:20am hrs
Key trend that we could see in the automobile sector is a steady growth rate in all sectors of the automobile industry. Sustainability of such growth due to development of road infrastructure and at the same time, availability of finance for buying the automobiles at reasonable rate of interest are major factors of the growth.

Except the two possible dampening factors like hike in interest rate or fuel rate, I do not see any major negative impact on automobile growth.

In banking, with the increasing purchasing power of economy as a whole and with majority of the population having sufficient propensity to save as well as to spend, banking is on major growth path. In addition to growth in retail areas, the growth in the SME sector will contribute substantially to the overall health of banking institutions.

The perennial problem of NPAs should come down and with gross investment in created assets from the institutions being on a rise, the demand and offtake of funds by the corporate sector will also move up. The banking system is likely to be flush with funds unless huge amount of deployment happens.

The wish list

The government policy of creating and distributing wealth to the majority of the population in the agrarian economy should be followed with vigour since only through a balanced growth of urban vs semi-urban/rural areas can we bring about equilibrium into the economy. Maintaining of such equilibrium in the society is vital so that the socio-economic fabric does not get disturbed by any disruptive forces.

Concerns

I feel that the following precautions should be important for the economy:

The country should not try for capital account convertibility unless it is done in a calibrated manner.

The other point of concern is real estate. We need to ensure that economy is not over-heated, because if it reaches that point then it may lead to a bubble-bursting. Negative impact of the same would be on such a bigger canvas that damage control at that stage would be next to impossible.

It is natural that inflation as well as interest rate gets north bound in growth conditions. While moderate increase in both of them are better than deflation or stagflation, we should be extra careful to ensure that they do not go beyond the limit warranted by corresponding economic growth in the country. The regulatory authorities will have to ensure that there is equilibrium between the two.

There is very strong tendency of the present day economy considering market valuation as the benchmark of economic growth and success. While market value is fairly independent and indicative of the success, it should be considered as only one of the indicators.

Emphasis needs to be more on asset creation which will aid long-term tangible growth of the economy particularly for the majority of population of the economy. This will create wider purchasing power amongst them, leading to substantial demand for both capital goods and white goods, thus necessitating further investment and 'growth capital' in the economy.

The author is group president-finance and group CFO, Hinduja group India