Spring in winter

Good economic news should lead to policy action

There is a spring in the Indian economy’s step. The past month has seen a spate of good news, barring the bad news with respect to food price inflation, and the potential risk of rising inflationary expectations. The last quarter’s national income growth came in at 7.9 per cent against the expected 6.5 per cent; the index of industrial production went up by 10.35 per cent in October, from 9.6 per cent in September; and exports reversed a 13-month decline, growing by an impressive 18.3 per cent in November. All of this was reflected in renewed revenue buoyancy. So, it is not surprising that Moody’s has revised from “stable” to “positive” its local currency rating for India. While this still remains below the even higher ratings of Standard & Poor’s and Fitch, the expectations are that India ratings will go northwards. The concern remains inflation, which is mainly supply-induced. But, here too, one must not underestimate the positive growth effect of higher farm prices, with rural consumption having sustained home market growth in a year of export slowdown. The improvement in macro and sectoral numbers runs parallel with good news from the markets. Public offers of shares have met with a good response and the rupee has shown stability.

Thus, apart from food price inflation, there are no alarm bells ringing. The positive economic environment, coming in the wake of an election that stabilised the government, should have helped the ruling coalition focus more purposefully on the economy than has been the case. However, yet another wasted session of Parliament, with few important economic Bills passed, suggests that there is a disjunction between what the economy expects of the government and what the government is able to deliver. Apart from getting pending Bills cleared, if necessary with help from the Opposition, the government must face up to the critical challenge of working out a phased withdrawal of the fiscal incentives introduced a year ago, and perhaps begin some monetary tightening to ward off inflationary pressures. It will have to show determination in improving its fiscal position if it wants the good news to translate into a sustained economic recovery next year. The finance minister has so far indicated his intention to reverse the recent deterioration in fiscal parameters and that augurs well. If this is to be done without hurting growth, policy reform must aim at encouraging new investment and sustaining growth.