The Hindu Business Line : Running well

IF THE INDIAN economy can sprint at 7.4 per cent in the second and third laps, as it has in the first, the effort will be worth a few cheers. The current account is in surplus while a higher trade deficit of $6.3 billion ($5.56 billion) indicates a rise in the crude bill and, more important, a surge in imports of raw materials and capital goods — a sure sign of a step up in industrial activity. But the fast clip of 7.4 per cent in April-June against 5.3 per cent for the corresponding previous period factors-in neither an uneven monsoon nor the sticky international crude prices, ruling at $50 per barrel and on which Indian managers have no say. In about a month's time, a fair report on the kharif and the following rabi crops should be available and if the output is anything near last year's, it could douse (even if only partly) any high price expectations in various markets.

Inflation has eased to 7.80 per cent (as of September 18) against 7.87 per cent the previous week and is a nagging worry for the government, especially with elections in Maharashtra ahead. New Delhi has preferred pruning import duties and running a higher fiscal deficit (20.8 per cent higher in April-August 2004) though at the end of day a fiscal imbalance places extra cash in the system with implications for prices. Some prefer fiscal rectitude, with the economy trying to live with expensive petroleum products as they do not see any sharp fall in international crude quotations what with too many developing nations steaming on a high-growth trajectory. For New Delhi, it is a hard choice as inflation hurts poor the most. On a par is a nagging worry over interest rates rising, which could stall investments in industry and agriculture. Credit off-take has been quite strong with banks placing lesser amounts with the Reserve Bank of India to earn 4.5 per cent. Seemingly, the central bank is not worried as the mark-up in the CRR (cash reserve ratio) and a pick-up in growth will bleed the system of excess funds to curb inflation.

Financial markets have smelt the gambit and yields on Gilts have been on the boil. At some point the reversal could nudge corporates to banks, which may not be averse to pushing up lending rates to make up for a dip in trading profits apart from government borrowings turning costly. Over the last three years FDI (foreign direct investment), FII (foreign institutional investment) and NRI deposits provided the critical loose cash that sent interest rates scraping the market floors but today they cannot be taken as given. Capital inflows in April-June 2004 were higher than that over the same period last year but there is no confirmation that the incoming dollars will earn exciting returns. If foreign players do get miffed, bankers see a drying up of cash in the system before the year is out and this could well be independent of the RBI's stance on fund pricing.