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India: Life means more...

Aug 28, 2003

The Indian economy seems to be on a higher growth trajectory, so says the 2002-03 annual report of the Reserve Bank of India (RBI). The report, actually, vindicates the fact that the health of the Indian economy is looking better than ever in the recent past, and that the GDP growth is likely to surpass the 6% target as projected in the monetary policy announced in April 2003. The reasons for this optimism as cited by the report are numerous, and include a stable inflationary situation, soft interest rates scenario, strong foreign exchange reserves, improved trade and optimism in farm recovery and growth in the manufacturing and services sectors. This article takes a closer look at some variables characterizing the contemporary Indian economy.The graph below signifies the optimism towards higher economic growth in the future. It shows the sectoral deployment of gross banking credit in the past three years. While credit for food has declined over the past year, that for non-food segments (agriculture, industry, trade, housing, consumer durables, etc.) and export have risen. While increase in non-food credit is an indicator of the fact that the Indian economy has started to gain momentum, rise in export credit signifies the move towards increased exports and, in turn, the rising competitiveness of the same. RBIs policy for a soft interest rate regime has aided this rise in credit offtake.

On the inflation front, the chart below is indicative of the fact that the base level of inflation in the country, both as per the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) is on a downward trend. This is after the rise that was brought about mainly by the hardening of international crude oil prices due to the Iraq war. As oil forms a major chunk (28%) of our imports and also that of our basket of commodities used for calculating inflation, any movement in the global oil prices affects the rate of inflation. Now, with the inflation (WPI) hovering around the 4% levels, and interest rates looking soft, the time seems ripe for the RBI to take a major policy decision in the implementation of its financial sector reforms process.

Coming on to the financial sector reforms, while the last decade has seen a lot of regulatory activities at improving the Indian financial system, the real test lies in their proper implementation. Strengthening of the financial sector and improving the functioning of the financial markets would involve prudential norms aimed at imparting greater strength to the financial system. Initiatives on inculcating greater accountability and market discipline on participants would go a long way in improving the vibrancy and resilience of the Indian financial system. This would, in turn, initiate higher investments thus beginning a new cycle of higher growth.

The Tenth Five Year Plan (2002-07) envisages an 8% GDP growth for the Indian economy. As we have under performed that benchmark in the past year (4.3% GDP growth in 2002), the challenge for the future stands bigger. Going forward, any sustainable growth of the Indian economy can be brought about by a focused approached on the five basic priorities poverty eradication, infrastructure development, fiscal consolidation, development of agriculture and enhancing manufacturing sector efficiency. The first of these five is actually a consequence of the rest.

Another important initiative is required on the external front, though a greater integration with the global economy. If India needs to participate in the growth of the global economy (particularly those of its neighbours), this factor has to be given a high priority. This would further enable the growth of the Indian economy, as it would then benefit from the synergies that this global cooperation would bring. Though this measure is not without high risk, India has to carry on with it in its journey towards higher growth that began with the initiation of the reforms process in 1991.

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