"….. the Indian economy grew at 8.4% in the quarter July-September 2004. Next, India has joined the club of countries with foreign reserves exceeding $100 billion…. "

The year ended with a virtual spate of good news for the Indian economy. First and foremost, according to the latest estimates of national accounts, the Indian economy grew at 8.4% in the quarter July- September 2004. Next, India has joined the club of countries with foreign reserves exceeding $100 billion. In a complete shift from the usual, India's current account has bounced back from a deficit to a surplus of $524 million spurred by a record growth in NRI remittances. A simultaneous surge in FII inflows has resulted in a record BOP surplus of $8.4 billion - one of the highest in recent years. The other source of cheer is the return of the commodity sectors to the forefront of the current resurgence - preparing the ground for the economy to charge on all the available engines of growth. In short, this year has seen opening up of new horizons and areas of new possibilities for the Indian economy. All of these favourable developments have been reflected in the current Bull Run on the Indian stock markets with the Sensex breaching the 6000 mark and attaining an all-time high in the last two weeks.

The stupendous growth in the GDP has come on the back of a 7.4% growth in Agriculture as against a decline of 3.5% in Q2 2002-03, a 7.3% increase in Manufacturing compared to 6.5% in the corresponding quarter last fiscal, a 11.9% growth in trade, hotels, transport & communication as against 8.1% in Q2 the previous fiscal. The combined effect of such improvement in the performances of these sectors has been to raise the GDP growth rate in the H1 of the current fiscal to 7% compared to 5.2% in the H1 of the last. This also increases the probability of the final growth figure for the year as a whole to surpass 7%. This will be a commendable feat because in the past the Indian economy went past the 8% mark only thrice. What is more important perhaps is the fact that this growth has not yet put undue pressure on prices and inflation continues to veer around a not so worrying level of 5%. This would imply that the policy planners could afford to keep the low interest regime going for some more time and create an investment-friendly policy environment. Similarly, the impressive build-up of foreign reserves has freed the policy planners from another important constraint for some more time.

Such enhanced flexibilities in the important macro-economic variables, however, have been neutralized by the large fiscal deficits run up by the central and the state governments. Apart from its implications in terms of possible crowding out effect in the capital market, such large public sector debt also restricts the ability of the state to undertake much needed investments in the creation of physical infrastructure. The good news on this front, however, is that the some of the major disinvestments programmes in the oil and gas sectors have at last been given the green signal and the legal complications regarding others are likely to be sorted out very soon. The inflow of funds on these accounts should help the government to reduce the gap between its revenues and. expenditure. Moreover, this year has also been a year of better fiscal discipline and the fiscal deficit so far has been maintained at the budgeted level.

Analysts have also felt some discomfiture with the massive inflow of FII funds in the secondary stock market. The memory of the Asian meltdown still haunts the collective mind of all developing economies in spite of the stricter checks in place in all related institutions - domestic and multilateral. A slack in capital formation constitutes another source of worry, especially for sustaining a high enough long run growth of the economy. All in all, however, for the Indian economy there has been an exceptional improvement in the ground conditions. As a matter of fact, a large section of the Asian economies led by China - have registered notable progress in the last two years even as the European and other Western economies faced a tough time. With the American economy gaining in the recent weeks, China and the USA have become the major motivating force for regeneration of the world economy. The feeling of prosperity in Asia after a long hiatus of more than half a decade, has also led to a new feeling of camaraderie among the major Asian economies.

The recent months have seen growing bonds of co-operation and trade amongst the neighbouring Asian countries. The last leg of 2003 has seen some very hectic parleying to foster this spirit of mutual co-operation in this region of the world. In the globally integrated world of today, we should extract the maximum mileage from our combined resources - material, knowledge based and organizational. The WTO and the principles of multilateralism have already had a profound impact on the way the world undertakes production and exchange of commodities and services. We have also witnessed a free flow of international capital to the most profitable destinations. Along with the institution of the WTO and rules-based multilateral trading regime, there has also been a parallel extension of the regional free trade blocs during the last two decades. Free Trade Areas (FTA) have been working well in the ASEAN region and the NAFTA and the Mercosul - apart from the European Union. Perhaps, the greatest challenge currently lies in combining the principles of global free trade as expounded in WTO and the limited free trade as practiced in the Regional Trade Blocs and maximizing the benefits to the participating nations. Geographical proximity is after all an unalterable fact of life and the most should be made of the shared opportunities. The expansion of the EU membership to include the erstwhile centrally planned economies has added a new dimension to the organizational possibilities of such regional trading arrangements. We would hope that the Asian trade blocs get strengthened and prosper as its European counterpart.



( J P Singh Joint Secretary, Ministry of Steel & Chairman, JPC)
(This is excerpted from JPC Bulletin Nov'03)