The Indian growth story seems to be firmly on the upswing as the year draws to a close, despite reform legislations stuck in the logjam between the Government and the opposition, prompting the policymakers to talk of 9 percent expansion this fiscal, which had seen a roadblock after the global financial crisis hit India in 2008.

The year, that saw tussle between regulators as well as regulators and the Government, also witnessed some reforms in newer version of insurance policies called ULIPs. Besides, reforms did happen in capital markets in terms of public shareholding norms, but they were diluted later in favour of public sector units.

Uncertain winds from outside and domestic challenges in case corruption issue snowballs into major credibility crisis, reforms do not take place, and cash shortage prolongs, may hit the growth again.

In fact, for this fiscal itself the government gave a wide range of projection for growth--8.75 per cent plus, minus 0.35 per cent, clearly showing that the policymakers are not dead sure about nine per cent economic expansion.

Towards the end, rising onion prices emerge as another challenge that together with expensive milk again catapulted food inflation to double digits, but hopefully this may not take the form of crisis and resolved soon or at least policymakers hope so.

After the Government could take steps to control onion prices, tomato and garlic prices flared up, giving sleepless nights to the establishment as well as the common man.

The headwinds emerge in the form of any possible contagion from sovereign debt crisis in a few countries of Europe. Then there is cash-shortage that is choking the system, that forced
RBI not to take further money tightening steps to control inflation, and instead the central bank announced steps to boost liquidity to the tune of Rs 48,000 crore.

Besides, the issue of corruption in 2G that is still unfolding through Radia tapes may take sheen out of the growth story, or at least there is such fear. Fast growth itself becomes a risk and may further exacerbate the inflation and result in overheating if supply does not match the expectations or demand.

The Indian economy had come under the impact of global financial crisis after the US financial services icon Lehman Brothers collapsed in the middle of January in 2008 that sent the shock waves around the world. Before 2008-09, the economy was growing at average nine per cent per annum for the previous three years and 8.7 per cent for the previous five years.

The crisis, however, did not have direct bearing on Indian economy as all banks and financial institutions were safe since they have only marginal exposure to the toxic assets outside.
However, its ripple effects coming in the form of slackening demand outside that hit exports and withdrawal of money by foreign investors from Indian markets.

The result was that Indian economic growth slowed down to 5.8 per cent in third quarter of 2008-09. That forced the government to provide stimulus to the economy. It cut duties in phases--excise duty by 6 per cent and service tax by two per cent-- and step up expenditure to provide the dose to perk up the economy.

The economy grew by 5.8 per cent during the last two quarters of the economy during 2008-09, resulting in just 6.7 per cent growth in the whole of that fiscal. With stimulus, the economy slightly recovered to 7.4 per cent during 2009-10. That prompted the government to partially withdraw stimulus by raising excise duty by 2 per cent since fiscal deficit was going out of hand.
Despite that, Indian economic growth accelerated to 8.9 per cent in the first half of this fiscal, giving hopes to the Government that the expansion may accelerate to over 9 per cent this fiscal.

The Mid-Year Analysis, tabled by Finance Minister Pranab Mukherjee in Parliament, said, "The very rapid 8.9 per cent growth in GDP recorded in the first half of 2010-11 raises the possibilities of a faster recovery to the pre-crisis level...It is estimated that growth in 2010-11 will be 8.75 per cent with variation of 0.35 per cent on either side."

It said the growth in the current fiscal is broad-based, which portends well for a stronger than estimated economic prospect. The Government was earlier expecting growth in the range of 8.5 per cent plus minus 0.25 per cent.

The broad-based nature of GDP is all evident from the fact that monsoon helped the agriculture, otherwise a sluggish sector, to grow by 4.4 per cent in the second quarter of this fiscal against just 0.9 per cent last year, that witnessed drought in many parts of the country.

Manufacturing too expanded by 9.8 per cent against 8.4 in the year ago period. Trade, hotels, transport and communication expanded by 12.1 per cent against 8.2 per cent.

However, infrastructure remains a problem, particularly with power generation. Electricity, together with gas and water supply rose by just 3.4 per cent against 7.7 per cent a year ago.

In fact, manufacturing though seem to be growing has also slowed down if seen in sequential basis. Manufacturing had grown by 13 per cent in the previous quarter.

But, why has the government given a larger range of economic growth projection compared to what was predicted earlier? It is because there is uncertainty in Europe, which accounts for 36 per cent of India's exports.

"Now why we have shifted the goal post from 0.25 to 0.35 per cent, one of the reasons being there have been certain uncertainties particularly recovery of Euro. And Euro has relevance both from viewpoint of FDI, investment and also from external trade, particularly export," Mukherjee said.

"A sizable percentage of Indian exports are destined towards Europe. Therefore, the recovery rather rapid and robust recovery of Euro is important from India's point of view," he said.

After gripping Greece, Spain and Portugal through sovereign debt crisis, the financial mess has now taken toll on Ireland through banking crisis.

After nearly a year of crisis due to recession in advanced countries, exports revived and the government hoped to surpass the target of 200 billion dollars this fiscal against 179 billion dollars in the previous year.

October 2009 saw reversal of declining trend in exports and the situation kept getting better and better with each passing month of 2010.

"If you look at all the big ticket items on our exports – whichever you want to pick up - cumulatively, all of them had good growth rate for the April-November period," Commerce Secretary Rahul Khullar said.

Besides European contagion, the stand-off between the government and the opposition over formation of Joint Parliamentary Committee to look into 2G scam may also impact the growth process, at least in the long run, since a number of reform bills are pending in Parliament.

A bill to hike FDI in insurance from 26 per cent to 49 per cent, pension reforms bill to give statutory powers to interim regulator PFRDA and banking regulation (amendment) bill to raise voting power of foreign entities in the private sector banks are crying for attention of Parliament.
These bills were proposed during the regime of the UPA one. In fact, the then Finance Minister P Chidamabaram had asked for political space to carry out these reform bills, but that time the Left came in the way. After the left was out of the supporting partner of UPA, insurance bill was tabled in the Rajya Sabha.

But since then, not much has been happening on these reforms, particularly because of impasse in Parliament. The differences between the Government and the opposition over JPC have also cast its shadow in indirect tax reforms, albeit indirectly.

Indirect tax reforms will come in the form of Goods and Services Tax (GST), but differences between the Centre and states have seen the proposed system missing the two deadlines of April 1, 2010 and a year later.

Now, the Finance Minister desires to roll it out from April 1, 2012 when direct tax reforms in the form of Direct Taxes Code (DTC) are scheduled to be carried out. But it is easier said than done.
The state finance ministers met nearly every month to arrive to discuss roadmap for GST. But the divergence of views between the states and the Centre and even among the states led to no progress in implementing the indirect tax regime.

GST is expected to replace state-level VAT and excise duty as well as services tax on the Centre’s front, besides local taxes, cesses and surcharges.

Coming in the way of consensus, are the BJP-ruled states, besides Uttar Pradesh and Tamil Nadu. This has prompted Haryana Finance Minister Ajay Singh Yadav to observe that GST has become a political issue and top leaders of both the Congress and the BJP should discuss to remove the deadlock.

However, the Government was able to table the much-awaited DTC bill in the Lok Sabha in August. The DTC is expected to provide relief to income tax payers, both personal and corporate and would replace the archaic Income Tax Act.

The bill was tabled, after two major concerns of the industry and the public were addressed. The first draft of the bill had proposed levying tax on long term savings like pension, provident fund and calculating minimum alternate tax (MAT) on assets of the companies instead of profits.
Facing the opposition, the Government dropped these two controversial proposals in the final bill, that has since been referred to standing committee.

All these reforms will go a long way in putting the economy firmly on the path of high growth rates. The year also saw reforms coming in the form of the Finance Ministry asking every listed companies to increase public holding in them to 25 per cent within three years.

However these norms, were later relaxed for public sector units, as listed entities among them have to now increase public shareholding only to 10 per cent.

Another reform that is on the way is the establishment of Financial Stability and Development Council, which will prevent interregulatory issues as well as help mitigate the impact of another global financial crisis on Indian economy, if it strikes again. The proposed FSDC raised the issue of regulators autonomy, with the RBI expressing its reservations over the council.
Currently, inter-regulatory issues are sorted out by a body called High Level Coordination Committee (HLCC) among financial sector regulators. It is chaired by RBI and has representatives from SEBI, IRDA, PFRDA and the Finance Ministry.

To assuage the feeling of RBI, which feared dilution of its autonomy, the central bank was made head of a sub-committee within the proposed council, to be headed by the Finance Minister and is expected to take shape in the remaining days of this month. The turf war between market regulator SEBI and insurance watchdog IRDA as to who should regulate unit-linked insurance products (ULIPs), which unlike traditional plans do not have assured returns and whose value is dependent on the capital markets.

Ultimately, the Government gave the right of regulation of these products to IRDA and established a joint committee of the Finance Ministry and regulators to check inter-regulatory issues in future. The committee is headed by the Finance Minister. RBI had expressed reservations over this committee as well. To pacify it, the RBI Governor was made vice-chairman of the committee.

The tussle between IRDA and SEBI proved to be beneficial for ULIPs, though in disguise. IRDA came out with a number of corrective mechanism to address the issue of ULIPs which was otherwise taking the form of mutual funds instead of insurance policies and irritating SEBI and the mutual funds industry. The issue of corruption in 2G scam and leaked Niira Radia tapes over lobbying for the telecom ministry also have the potential to be roadblocks in the growth story.

Recently, HDFC chairman Deepak Parekh said that the leaked tapes has brought risks in neutralizing the country's growth. He also said the government should work as a team to get things back on track.

"The big boys in the government are pulling in different directions and not working as a team. They are following their own agenda, own departmental agenda, not looking at a broader picture, the PM has to get that organized," he said.

Then there are the differences between the strict environment norms, that some say will pull down the economic growth rate.

The Ministry of Environment and Forests has defined 'no-go' areas for mining as those that have over 30 per cent gross forest cover or over 10 per cent weighted forest cover and the mining is allowed only in the 'go' areas.

Due to this, 206 coal blocks across 4,039 sq km in nine coalfields that have a production potential of 660 million tonnes (MT), were designated as 'no go' areas. Planning Commission Deputy Chairman Montek Singh Ahluwalia said recently that "if we get a sensible definition of what is 'nogo'... something that is called 'no-go' for now does not have to be 'no-go' forever. But the main point is that they should be flexible". Though the government claimed that inflation is on a downward trend, the food inflation again entered into a double digits, perked up by onion and milk prices.

In its mid-year analysis of Indian economy, the government said high inflation, which was a major concern, has started declining and hoped that it may fall to six per cent by March, 2011 from over seven per cent now.

Food inflation contributes over 14 per cent to overall inflation, and other things remaining the same would push up the rate of rise at this proportion.

Besides, there are concerns about the high global commodity prices, particularly oil. Already the oil marketing companies have raised petrol prices by close to Rs 3 a litre. The Empowered Group of Ministers is engaged in deciding about diesel prices.

While announcing measures to pump in additional Rs 48,000 crore into the system to ease liquidity situation, the Reserve Bank in its policy review earlier this month clearly stated that the steps should not be interpreted as reversal of tight monetary stance since inflation is still a major concern.

"Such provision of liquidity should not be construed as a change in the monetary policy stance since inflation continues to remain a major concern. The measures taken in this review need to be appreciated in that context," it said.

The system came under cash crunch, due to festive season and the government not spending fast enough compared to its earnings. The extent of liquidity shortage can be gauged from the fact that banks have been borrowing on an average Rs 1 lakh crore from the RBI against government securities on an average daily.

"This (liquidity shortage) has been mainly due to persistence of large government cash balances which have averaged Rs 84,000 crore since the Second Quarter Review of November, mirroring in the average net LAF repo amount of Rs 1,01,000 crore," the central bank said.

The government has collected robust revenues, both from tax and non-tax sources, but has not been spending fast enough, creating cash crunch in the system.

The indirect tax collection rose by 42.3 per cent to Rs 2.07 lakh crore during April-November this year, which is 66.3 per cent of the overall target of Rs 3.13 lakh crore fixed for 2010-11.
The direct tax collections surged by 17.85 per cent to Rs 2.16 lakh crore during April-November this year.

The Government also got over Rs 65,000 crore more than budget estimates through auction of spectrum for high speed mobile and broadband services. It also got Parliament’s nod to spend close to this much amount over Budget estimates in two supplementary demands for grants.
To ease liquidity situation in the market, the Government had also reduced its market borrowings by Rs 10,000 crore to Rs 4.47 lakh crore.

Recently, the Government also reduced its scheduled market borrowings by Rs 10,000 crore more, but said it would be adjusted later and overall market borrowings this fiscal would remain at Rs 4.47 lakh crore.

Helped by Coal India and others, the Government is on way to garner Rs 40,000 crore through disinvestment which will be used for financing its social sector needs. Otherwise, the social sector spending would have to be done by other resources that could have widened fiscal deficit.
All targets of fiscal deficit went awry after the Government provided stimulus by cutting taxes and increasing public expenditure since the late 2008.

2009-10, it further widened to over 6.5 per cent. With the Government partially withdrawing stimulus by raising excise duty by two per cent in the Budget of this fiscal, the government has targeted to reduce fiscal deficit to 5.5 per cent this fiscal, which is better than the 13th Finance Commission's roadmap of cutting it to 5.8 per cent. The Government is well on the way of meeting this target. Its fiscal deficit has touched Rs 1,62,336 crore till October which is 42.6 per cent of the target for this fiscal. With five months still to go, the Government seems to be attaining this target.

But, will the target would actually be met when the Government starts spending in the last quarter as is asked by RBI. Yes, say Finance Ministry officials. The Government also claims that fiscal deficit would be further reduced to 4.8 per cent of GDP next fiscal, and it will try to bring it down to three per cent soon after that, though no timeframe has been fixed for that. If the Finance Commission's recommendations are to be followed then fiscal deficit should be reduced to 3 per cent by 2013-14, four years after the original plan, set by the FRBM Act.

So, Indian economy seems to be in the robust shape, but challenges like corruption, high food inflation, headwinds from overseas, reforms taking backseat etc are knocking at the door and we can ignore them at our own peril only.