India entered the new year in a robust state of health. The economy is rocking. The country is expected to clock a growth rate of 7.5-8 per cent during 2005-06; global investment firm Credit Suisse First Boston is even more bullish; it expects the figure to touch 8.5 per cent. The industrial and the services sectors are providing the momentum, and given their healthy growth in the last couple of years, such a clip seems sustainable. "The economy is on an upward incline that is likely to last for the next two-to-three years," says economist D.K. Srivastava, Director, Madras School of Economics. The reason for such optimism: the savings rate is likely to rise from its current level of 28.5 per cent to 30 per cent over the next three years; there is little pressure on interest rates and inflation; the investment climate remains favourable; consumer and business confidence remain at all-time highs, and oil prices are unlikely to breach the $70 (Rs 3,150) a barrel mark they had touched last year.

Surjit Bhalla, Managing Director, Oxus Research and Investments, believes that India is already clocking 8 per cent growth without any additional reforms. "The real challenge is to take this growth figure to double digits," he adds. But for that to happen, the government will have to resolve infrastructure bottlenecks, lift the sectoral caps on foreign investments in various sectors, push ahead with labour reforms and take steps towards the creation of a common Indian market.

Saumitra Chaudhury, Member, Prime Minister's Economic Advisory Council, maintains that the economy will continue on the 7.5-8 per cent growth curve in 2006 "barring some unforeseen and drastic problems". Yet, there are areas of concerns. A recent Morgan Stanley report points out that the widening current account deficit (nearly $6.2 billion or Rs 27,900 crore till December), the creation of an asset bubble and rising Fed rates in the us could offset the potential positive impact of a pick-up in the investment cycle. But experts feel the economy has sufficient resilience to withstand these shocks. Conclusion: it should be business as usual this year, unless the global situation turns adverse.

-Ashish Gupta

Against The Tide
The country's export growth slowed in November. Is this an aberration or a trend?

November blues: A passing phase?

It's a setback that comes against the general run of play. For the first time in 44 months, India's merchandise exports contracted in November, compared to the corresponding month last year. The sharp drop-to $6.2 billion (Rs 27,900 crore) or 11.4 per cent less than in November 2004-was attributed to a decline in the exports of engineering goods, textiles and gems and jewellery.

Rafeeq Ahmed, former President of the Federation of Indian Exporters, feels falling demand in Europe, which is facing a substantial unemployment problem, meant there were fewer takers for lifestyle products such as leather garments and branded garments there.

But the moot question still remains: why did exports suddenly dip in November after growing 16 per cent to $57 billion (Rs 2,56,500) crore in the first seven months of the current fiscal? Engineering exports, which were down $150 million (Rs 675 crore) from a year earlier, fell primarily because a steep fall in global steel prices resulted in lower realisations; and gems and jewellery exports fell $300 million (Rs 1,350 crore) following the government's crackdown on "round tripping" (companies were exporting imported gems without making any value addition and enjoying 15 per cent duty benefits). And exports of man-made fibres were affected by the uncompetitively high prices of raw materials.

However, what is of greater concern to the Indian trading community is a recent notification by the government, making it mandatory for all companies with a turnover of Rs 1,000 crore to pay income tax on all refunds made by it under the Duty Entitlement Pass Book Scheme with retrospective effect. This, says O.P. Garg, President, FIEO, will affect exporters of engineering, agro, leather and marine products. But both commerce ministry officials and foreign trade experts are unanimous that the November figures are an aberration and were due to sectoral factors and do not signal the birth of a new trend.

-Ashish Gupta

Tigers In Our Living Room
What the FTA with ASEAN means for India's future.

Regional free trade agreements (FTAs) continue to find favour with the Indian government. On the anvil is the biggest of them all: India's accession to the 10-member Association of South East Asian Nations (ASEAN). No wonder, India Inc. seems paranoid, though full membership will come only in 2011. Hence, the first sensitive list, comprising goods that will be spared any duty cuts, presented to ASEAN had 1,400 items in it. This was rejected and the government has been given time till June 2006 to prepare a second, shorter list.

Several sectors-like auto components, telecom hardware, refrigerators, colour television and textiles, among others-are lobbying strongly to be included on this new list. The auto-components industry is already feeling the heat from the FTA with Thailand, which has the biggest auto-components manufacturing base in Asia (apart from Japan). That country is only three days by sea from Chennai, one of the country's auto hubs. The fear: with all duties scrapped by March 2006, international carmakers may find it cheaper to source components from Thailand rather than India. And the textiles and food processing industries are running scared of cheap imports from Malaysia, Indonesia and Philippines.

"Some industries may be hit in the short term," says Nagesh Kumar, Director-General, Research and Information System for Developing Countries, a think tank under the Commerce Ministry, adding: "But the long-term impact will be beneficial." He also points out that the auto components industry is now globally competitive; so far from being threatened, the FTA might actually open up huge opportunities for it. Recent history seems to support this argument. Every step towards opening up the Indian market in the past has been met with howls of protest from special interest groups, but Indian industry has responded by ramping up efficiency and capacities every time. The government is obviously hoping that this trend will replicate itself this time as well.

-Ashish Gupta