When times are good

As he readies to present the Union Budget today, the finance minister will have the comfort of knowing that the economy is in excellent shape, as the government's annual Economic Survey points out. Gross domestic product is projected to grow by around 7 per cent this year, which is good following a less-than-normal monsoon.

Inflation has been controlled, with the average for the year so far no more than 6.4 per cent, despite the high oil prices and the commodity price boom. There is only a small current account deficit, and export growth has been well ahead of target despite the appreciation of the rupee against the dollar.

The reserves of food and foreign exchange remain high. The Index of Industrial Production showed year-on-year growth of 7.9 per cent in December, with the manufacturing sector rising by 8.8 per cent.

The third quarter corporate results show that both revenues as well as profits are growing strongly. And in spite of the sharp rise in credit, interest rates have not only remained steady but have in fact come down in the bond markets in recent weeks. As a consequence, the consumer durables and mortgage markets continue to be robust.

Foreign funds have continued to flow into the country. The fund inflows, and the excellent corporate results, have buoyed the equity market, which reached an all-time peak earlier this month. The primary market too has come back to life, with new issues being lapped up.

Even the government's fiscal numbers are not bad, although tax collections are likely to fall short because of overly optimistic targets. Nevertheless, that shortfall should be more or less neutralised by lower expenditure, and Mr Chidambaram should therefore be able to show the fiscal deficit around the budgeted 4.4 per cent mark, although the revenue deficit will probably exceed the Budget estimate.

The government has even been able to go ahead with some reform measures, in the teeth of opposition""the opening up of different sectors for foreign investment and the initiatives taken in civil aviation are recent examples. In short, the backdrop to the Budget could scarcely be better, and the economy and the markets are in a "sweet spot" at the moment.

What can go wrong? First, the price of crude oil could stay high and climb further. There is the danger of infrastructure constraints squeezing growth; indeed the slowing rate of growth in the infrastructure industries points to fuller capacity utilisation and underlines the need for capital investment.

Fortunately, anecdotal evidence from banks and the corporate sector suggests that investment demand has indeed begun to rise. A third danger is that liquidity could become tight and raise the cost of money, especially if the government borrows too much, and one will therefore have to wait for the new fiscal numbers.

Finally, many of the positive factors are dependent on global trends. The rise in commodity prices and the increase in foreign portfolio flows are examples. Should these trends reverse, they will exact their toll on the economy and the markets.

The endeavour in policy making, accordingly, should be to convert the cyclical boom in the economy into a structural one, so that the growth curve keeps climbing.

The priorities have to be staying on course with fiscal correction, continuing with reform of the tax system, facilitating infrastructure investment, maintaining easy liquidity, easing the policy-induced constraints on productive forces and sustaining the general mood of buoyancy. These are what Mr Chidambaram should be expected to deliver.