The report says while the economy has broken out of the 3-4 per cent Hindu rate of growth, it is not certain that it can sustain 7-8 per cent growth rate without further economic reforms. It suggests that the government use the current momentum to further lessen its role in the economy so that the country can unlock its growth potential.
The analysis further says potential backlash in the US over outsourcing, an industry that has given a global footprint to India, is worrying. It can have a negative impact on balance of payments position, the report adds.
Strong capital inflows will continue to put pressure on the rupee. According to the forecast, the rupee can improve to Rs 43.80 per dollar by end-September. The government has decided to sterlise capital inflows and the cost will be borne by the exchequer. There will be a debate on the correctness of spending taxpayers money for sterlisation purposes. Perhaps the central bank should be more flexible in allowing rupee appreciation, the report suggests.
Referring to inflation, the report says the strong economic rebound coupled with higher global commodity prices will continue to fuel worries over the inflation outlook. Contrary to expectations, inflation so far has not eased substantially owing to last years high base. The main culprit, it adds, is the upward revision in fuel prices.