The Central and State governments face new challenges even as the recession in many developed countries is bottoming out and there are also signs of recovery. The behaviour of major bourses and reports of increased housing starts and higher consumer spending in the U.S. have led to cautious optimism about the coming months and 2010 in particular.

The Indian economy too has partly overcome the depressing experience on the export front. The decline rate in exports is coming down while the Commerce Ministry is keen to help export industries improve their competitiveness and lower their cost with incentives. These timely measures should enable exports to resume their earlier uptrend aided by improving overseas demand for various products.

Industry turns corner

On the industrial front, recent happenings have been heartening with core industries in particular turning out a good performance. Industrial growth in April-June has been impressive at 3.7 per cent against 3.4 per cent for the whole of 2008-09. The negative growth in October-March 2008-09 has given place to a positive trend. This uptrend can be expected to continue, taking the growth in output in 2009-10 to 6-7 per cent. Even with no significant contribution by agriculture and allied industries, the growth in GDP is estimated to be 6-6.5 per cent. With drought conditions in 278 districts in 11 States, the output of food crops, particularly rice, may be less in the current season.

However, even with a drop in kharif rice yield by 10-15 million tonnes, the situation can be managed, thanks to abundant buffer stocks of rice and wheat. The Agriculture Ministry can increase allocations to fair price shops and under the intensified national welfare programmes.

It is also exploring means to use open market sales of the two fine cereals to counter speculative activities and prevent a runaway rise in prices.

However, imports will have to augment low domestic output in edible oils, pulses and sugar. Already, foreign suppliers have jacked up prices for such items anticipating large purchases by state agencies and private parties from India.

A grim situation may arise in sugar early next year because of a poor crushing season ahead. Cane supplies will be grossly inadequate in Uttar Pradesh and Maharashtra, two major sugar producers. The Union Minister for Food and Civil Supplies is planning heavily subsidised sales of edible oils and pulses through fair price shops though the shortage in sugar cannot be easily overcome.

Rising subsidies

An intractable situation may arise in the coming months as world crude prices have been rising rapidly and are now around $72 a barrel against the low of $35 in the second half of 2008-09.

There will be a sharp rise in subsidies if it is decided not to increase selling prices for LPG and kerosene.

The rupee cost of imports also will go up if the external parity does not improve in October-March. The huge requirements of Central and State governments may well crowd out the private sector and make it extremely difficult for corporate borrowers to obtain their funds at reasonable rates. Credit needs will be much larger because of costlier inventories. Heightened stringency in the forthcoming busy season can be avoided only with a larger forex inflow on capital account.

Intensified borrowing

The Finance Ministry has been in a hurry to intensify its borrowing. The amount raised in April-July has risen sharply to Rs. 1,95,911 crore (Rs. 47,982 crore). In August also, new loans have been auctioned for Rs. 42,000 crore, the 23-year long-term issue carrying a coupon rate of 8.28 per cent. The average yield for the whole year may thus be higher than in 2008-09. Since there has obviously been a pre-emption of available investible funds, the monetary authorities will have to formulate their policies imaginatively and augment the pool of resources with a larger inflow of debt and non-debt forex receipts.

The government too will have to help institutional and other investors with appropriate fiscal incentives for savings. It is important to remember that a rise in inflation rate will be due mainly to shortages in essential commodities and imported oil inflation. Thinking will have to be different for suitably dovetailing fiscal and monetary policies and ensuring the retreat from dearer money.

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