At the half-way mark

This week will mark the half-way point of the fiscal year. A combination of economics and politics has made the first half of 2004-05 an unusually eventful period.

Looking ahead into the second half of the year, there are questions about both the sustainability of a relatively benign economic environment and the viability of the government, which is in a state of open conflict""not so much with the opposition as with its own allies.

While the global and domestic economic circumstances have been less than friendly, the overall situation remains broadly upbeat. The economy seems to have developed a healthy resistance to the kinds of shocks it had great difficulty coping with in the past.

Global demand and supply forces have pushed the prices of oil, steel, and other commodities to historic highs. This has resulted, understandably, in a sharp surge in inflation, exacerbated by the indifferent monsoon.

Given that average inflation in recent years has been around 5 per cent, there is pressure on the finance ministry and the Reserve Bank to act. They have done so, but with logic and restraint, in the firm belief that the rate of inflation will moderate sooner rather than later.

The global oil scenario still poses high risks, but that is something outside the government's control. Meanwhile, the foreign exchange reserves come in handy as a buffer against adverse developments on that front, just as the foodgrain reserves offer some protection against inadequate monsoons.

Industrial production has sustained its momentum of the last couple of years, growing at around 7 per cent. Higher energy prices may dampen the enthusiasm somewhat, and surveys of the business mood do show a significant drop in optimism about the future.

But so far there seems to have been little impact on the hard numbers. More importantly, the main growth driver in the sector is machinery and equipment, which indicates that new capacity is in the offing, a positive sign from the medium-term perspective of both growth and inflation.

This also means that industrial output is not going to be too vulnerable to the dip in agricultural production. Exports are going swimmingly, and as for services, while the first quarter GDP numbers will be out soon, there are no signs of any flagging of tempo. In short, there is both a reasonable amount of momentum and some cushion against potential shocks.

On the political and policy front, unfortunately, while the government has shown signs of walking the tightrope between taking reform-oriented decisions and demonstrating a "human face", the dominant impression is one of fractiousness. It is difficult to believe that this state of multiple gridlocks will not take its toll on policy formulation and implementation, and at some stage on government cohesion.

One can only hope that the political class will see the sense in taking full advantage of a still relatively benign macro-economic environment to address the problems that the elections brought on to centre stage.