India managed to display robust growth during the sub-prime mortgage crisis and was able to safely pass

through that phase without any significant exposure of its financial institutions. Even today, in the midst of a continued downturn in world markets, the economy is showing a projected a growth rate of almost 7%- a figure which, as Amartya Sen has pointed out, is something many countries would see as the stuff of dreams. It is true, however, that the Indian picture looks gloomy and advance indicators point towards further problems because of two aspects: 1. External Problems The Euro crisis has led to a drastic decrease in exports from India The American economy continues to tether on the brink of another recession Oil prices along with gold have continued to go up. This inelasticity has resulted in a huge Current Account Deficit (CAD) and Trade Deficit while FOREX reserves have also gone down 2. Internal Factors Policy Paralysis continues to take hold of our executive with no clear indication on future policies and decisions from the government. For example, the approval for FDI in retail followed by a hasty retreat, ambiguity in land policies and environmental clearances have led to a marked negative sentiment among the business houses of India and abroad. Input costs have gone up as raw materials for manufacture, coal for power generation are in short supply due to structural problems and instability in the states of Orissa, Chattisgarh and Jharkhand due to the presence of the Red corridor. Huge costs of subsidies and other national programmes such as MGNREGs have placed tremendous pressure on our economy with the Finance Minister even remarking that the above issue makes him lose sleep. Inflation has led to a decrease in savings rate and in investment as real income has not increased. India has always had a high savings rate which has declined recently by about 4%. Our proposed solution consists of a multipronged approach but which starts by the absolute necessity of enacting legislation in several key areas and of bringing out progressive policies and transparency in functioning. This includes the introduction of a new Manufacturing Policy, an equitable Land Acquisition Act, the need for the removal of some bottlenecks in agriculture and industry. In these fiscal measures, it is imperative for the government to keep a restraint on bringing out populist measures which causes a large burden on our deficit. The common characteristics of all countries which have attained a sustained high growth rate include openness, macroeconomic stability, high savings and investment rates, and market-based allocation of resources. Capacity building is the need of the hour as an increased outlay for infrastructure will go a long way towards promoting demand and growth. While measures such as the Food Security Act are laudable, the government must ensure that silos and storage facilities are equipped to handle any future food shortage. Current inflation is due to high input costs while food inflation has remained low. We cannot depend on this situation to persist for too long. Ultimately, the government has to move towards reducing the fiscal deficit which can be boosted by the auctioning of 2G spectrum recently freed by the Supreme Court. On the other side structural changes to the availability of coal and power is suggested. It is somewhat ironical that NTPC imports coal while Coal India remains the fifth

largest producer of coal in the world. Expenditures composition must be changed towards enhancing the supply response. As pointed out by several economists, we are seeing a resurgence of the domination of fiscal concerns on monetary policy. The deficit has to be financed and the responsibility for the credit flow lies with the Reserve Bank of India. In its Third Quarterly Review, RBI Governor D. Subbarro has pointed out to the rise of the trilemma- price stability, financial stability and sovereign debt sustainability. Debt stability still isnt a problem for India but increasingly countries are finding themselves to be victims of irresponsible fiscal practices and a resulting drop in investor confidence. Price stability has been traditionally handled by the RBI but it faces a precarious position. The recent drop in CRR notwithstanding, the repo rate continues to be high. Macroeconomic problems have forced the RBI to take a cautious stance, and financing the deficit has required it to undertake Ways and Means Advances (WMA) and Open Market Operations (OMO) for purposes of liquidity management. In this situation, there is a need to enact legislation to cap the total public debt as a proportion of GDP, including a cap on net market borrowing of the government. One of the more radical suggestions of our proposal is to bring out a new RBI act as the original one was created preindependence and todays volatile scenario requires a wider mandate and increased independence.