I wrote a column in Business Standard today titled Caution, dangerous curves ahead. I argue that while the Indian economy appears to be in extremely good shape, there are some important concerns about the period leading up to 2009:
- The resolution of global imbalances - which don't seem to be gently subsiding - and a potential reduction in the global GDP growth rate.
- The expenditure impact of the UPA's spending programs.
- The impending general elections of 2009.
- The FRBM deadline of 2008-09.
In the worst case, these problems could come together giving a `perfect storm' in 2008-09.
Hence, I argue that greater caution is called for, in fiscal policy and in economic reform. This perspective suggests that the bulk of the FRBM requirements should be fulfilled in 2006-07 and 2007-08 itself. I argue that fiscal policy will not stabilise, which emphasises the importance of stabilising monetary policy. This requires shifting away from the pegged exchange rate in order to obtain monetary policy autonomy. Finally, the present good times should be utilised to buy out pockets of discontent, and forge ahead with reforms, so as to build a strong economy, and be ready for hard times.