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India: Reform Is The Key To Lasting Growth

Business Outlook: India

India: Reform Is the Key to Lasting Growth

India's economic prospects this year and next look good, but a huge reform effort is vital to lasting success.

The latest data for the July-to-September quarter, the second in India's April-to-March fiscal year, show that the economy grew 6% from a year ago, about the same yearly pace as in the first quarter. A surprisingly strong advance in October industrial production and a sharp rise in November exports suggest continued strength in the third fiscal quarter.

The first majority government in a decade, led by the Bharatiya Janata Party (BJP), projects growth of 6.5% for the 1999-2000 fiscal year. Many private analysts agree, and they expect growth in 2000-01 in that range as well. The pace in 1998-99 dipped to 6%, after averaging 6.8% in the previous three years. Growth will be fueled by a rebound in India's huge agricultural sector, helped by the Asian recovery. The global upturn will especially benefit India's booming software industry.

Exporters will also be aided by a competitive rupee, which fell a bit in the past year as most Asian currencies rose. Still, the rupee is well supported by strong capital inflows in the fourth quarter and by tame inflation. Inflation is expected to pick up, from near zero, but not exceed the central bank's tolerance limit of 5% to 6%.

However, the BJP will have to deliver on its promises of reform. India's central bank would like to lower a key interest rate, now at 12%. But after just the first eight months of the fiscal year, the central government deficit is already at 81% of the full-year target. State government finances are in even worse shape: Substantial private investment is being crowded out by the government's huge financing needs. Weaker investment was one reason why overall growth slowed last year.

Reform efforts will have to be aimed at better tax collection, privatization of publicly owned companies, expensive government subsidies, and high interest costs on the government debt. The BJP's dilemma: Fiscal reform will crimp economic growth in the short run.By James C. Cooper & Kathleen MadiganReturn to top

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