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Confirming earlier predictions

The mid-year review of the economy, tabled in Parliament last week is, predictably, devoid of major surprises. Given that the next budget and the economic review are less than three months away, there is perhaps no scope for the government to spell out fresh initiatives in major areas of concern. Besides, of late, there has been a more frequent dissemination of official data. For instance, the Reserve Bank of India reviews its annual monetary and credit policy every quarte r. Under the circumstances, the mid-year review, which is mandated by the Fiscal Responsibility and Budgetary Management (FRBM) Act, will have to perforce cover familiar ground. Economic growth momentum continues to be strong but greater attention must be paid to disadvantaged groups so that they too share the benefits of development. Neither the plea for inclusive economic growth nor for that matter the immediate prognosis of economic growth is original. The high growth rate of 9.4 per cent in 2006-07 will largely be sustained during the current year. Despite some recent signs of a slowdown, the economy is poised to grow once again by at least 9 per cent. Services and industry have been the main contributors to growth. Aside from ensuring macroeconomic stability, everything possible must be done to sustain the competitiveness of industries. Agriculture is targeted to grow by 4 per cent. However, even with such growth the per capita income of people dependent on agriculture will be less than that of those engaged in other activities.

Of the other major areas of concern, the review has dwelt at length on the surging capital inflows that impact on macroeconomic aggregates, exchange rates, trade, and monetary variables. Management of such inflows is a complex task involving among other factors the exchange rate policy, inflation, trade, and issues relating to production and growth. The review, which makes the obvious point that the economy does not have the capacity to absorb all the inflows, has no new insights to offer. The fiscal cost of sterilising the inflows has gone up considerably above the budgetary estimates. The rising rupee has seriously affected export competitiveness in certain sectors. Inflation has fallen below 4 per cent after 68 months. However, global oil prices continue to remain high and the Indian consumer remains shielded. The review calls for a consensus on the vexatious issue of subsidies to food, fertiliser, and petroleum sectors. For all its constraints and repetitive exhortations, the mid-year review serves as a useful reference point in the budget season.

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