As good as it gets

The flow of economic news continues to be extremely positive. Industrial growth in October moved into double digits after a long time, at just over 10 per cent, and export growth in November was an even more handsome 26 per cent.

Inflation has been inching down, and is now 7.3 per cent. With the international oil prices dipping, there should be more relief""but for this to register in the price index, the government will have to pass on the benefit to consumers.

Tax revenues have been buoyant, and direct taxes in particular have shown remarkable growth at 33 per cent so far in the year; as a result, the fiscal deficit has come under control and is in line with budget projections.

For good measure, foreign exchange reserves have moved up sharply, by $3.79 billion in just one week, topping $130 billion for the first time.

The reserves at the end of 2003 were $102 billion, so there has been substantial accretion during the calendar year, though many will see this as a mixed blessing.

Finally, international optimism on India runs high, as reflected in the continuing inflow of investment into the stock markets, where the price indices are at all-time highs.

Against this unusually upbeat backdrop, and for reasons that are not obvious, confidence levels have taken a slight knock. Business confidence has shown a mild dip in the latest survey by the National Council of Applied Economic Research, though the absolute level is still high.

A consumer confidence survey also shows a modest fall. This latter could be a result of the higher rates of inflation in recent months, and it is plausible that both business and consumers will have been affected by the rise in interest rates, modest though it has been.

But politically, the government seems to have settled down and, with no pressing short-term issues to worry about, is busy with medium- and long-term issues of investment and growth, and with devising programmes for reducing poverty.

If there were short-term worries, they would have to be over inflation. But the evidence so far has been that it is specific commodity price increases that have caused the rise in the price indices, and there is no generalised inflation manifesting itself.

The other issue to sort out would be currency policy, in relation to the falling dollar and the continuing growth of reserves. While the rupee has gained by about 3 per cent against the dollar during 2004, this is much less than the gains of both the euro and the yen, while the Chinese renminbi is of course pegged to the dollar.

Given the possibility that this year too will see a small current account surplus, despite record oil import costs, and that this would be the fourth year in a row that there is such a surplus, there is a case for letting the rupee climb some more against the dollar if that is what market movements dictate. This also shows the elbow room that exists for tariff reform.