GDP growth in 2007

Indian Express, 1 January 2007

Will India witness high GDP growth in 2007? Can the economy go from strength to strength with consecutive years of high growth without being hit by power shortages and roads and ports clogging up? Despite most fears, which are certainly realistic because our infrastructure is something to worry about, the Indian economy has continued to reach new peaks. Morevoer, there is, until now, no sign that there will be a downturn in 2007 or that the economy would not grow at 8-9 percent rates that have been witnessed in the past 3 years.

The strength of the Indian economy appears to come from two sources. On one hand decontrol has unleased the energy of private initiatives, regardless of the UPA's efforts at slowing down or reversing market-oriented reforms. This have created an economy which has an inherent strength as it does not rely on the cleverness of a few planners. It depends instead on the energy and drive of millions across the country, who are benefiting from markets and globalisation. It is India's long term strength and the remaining economic reforms, as and when they will inevitably happen, will only improve this strength.

The second source of growth is more short term in nature. It is the expansionary fiscal and monetary policies of the government and the central bank. It is reflected in rising growth along with rising inflation. Despite the rise in inflation based on the consumer price index from less than 3 per cent per annum to 6.5 to 7 percent per annum, neither has government spending been cut nor have interest rates been hiked adequately. Expansionary policies have thus helped to keep growth high despite sharp credit growth and fears of overheating of the Indian economy. This source of growth may not continue in 2007. At some point it is likely that inflation becomes a bigger worry than it has been, and that the government tightens monetary policy. The recent increase in the Cash Reserve Ratio may be the first of the many steps that may be taken. If the UPA cares about inflation prevailing around the coming general election of 2008 or 2009, this requires monetary tightening in 2006 and 2007.

A major source of risk in the coming year is the world economy. The consensus of forecasters is that the world economy will slow in 2006 and 2007. A slowing world economy inevitably affects India through the burgeoning trade and capital account linkages with the world.

While most people expect that the world cannot afford a sharp fall in the dollar, the existing imbalances have created a situation in which things can go wrong. A downturn in the US economy has the potential to create a slowdown for the entire world and for India. This could raise difficult challenges for policy makers. One the one hand they could try to artificially prop up exports, by preventing the rupee from appreciating against the dollar. This would involve piling up reserves, creating more liquidity in the economy and creating inflationary pressure. On the other, they could allow the rupee to float, and in case it appreciates, take the risk of lower export demand.

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