The mid-year economic review 2007-2008 expressed concern that the strong growth prospects of the Indian economy have been manifest in high corporate profitability, rising investment rates, higher GDP growth and rising capital inflows. However, the economy’s capacity to absorb such capital flows has not risen as fast as the inflows,” it noted.

Pointing out that management of capital inflows has been and is likely to remain an important issue, the review admitted “there are short term challenges of managing inflows without endangering growth and price stability.”

Stating that economy is growing at 9.1 per cent in the first half of 2007-08, the review, tabled by Finance Minister P Chidambaram, in Parliament claimed “the Indian economy is witnessing a robust growth for four years in a row.”

Critical challenges

“Growth, however, needs to become even more inclusive,” it said and suggested “greater attention has to be paid to disadvantaged groups that are not sharing the economic opportunities opened up by growth.”

While taking stock of the economy during first half of 2007-08, the review noted critical challenges at the current juncture relate to sustaining the growth momentum with macro-economic stability and improving the competitiveness of industry and services sectors.

Dwelling on problem areas of the economy, it suggested greater attention had to be paid to agriculture policy and domestic and international trade to avoid inflationary pressures in the future. It also stressed the need for a drastic overhaul of urban development systems and procedures so that severe and debilitating shortage of urban land is converted into a surplus thereby minimising asset price inflation as a source of inflationary pressure and converting it into a driver of growth.

Significantly, the reviews suggested reviewing the subsidy regime with respect to food, fertilizer and petroleum products. In this context it stressed the need for a consensus for sector specific subsidies.

Turning to impact of rising rupee on export, the review said sectors such as textiles, handicrafts and leather experienced lower growth while gems and jewellery and petroleum products witnessed high growth.

Admitting that rupee appreciation could lead to job losses, the review said the medium and long term solutions lie in improving productivity in exports to make them more competitive.

Dwelling on infrastructure bottlenecks affecting the growth, the review further admitted that high cost of power alone was affecting the competitiveness of the domestic industry by 3 to 5 per cent.