Strong economic growth is expected to continue in India, at a projected rate of 8.5 per cent, given the high investment ratio that is now at nearly 30 per cent of the GDP, according to the Trade and Development Report 2007 released today by Unctad. The report says that the world economic situation is the most favourable for developing countries now, for the first time since the early 1970s, as the world economy continues to expand for the fifth consecutive year at a projected 3.4 per cent in 2007.

But the report warns that growth can persist only if economic expansion is not limited by policy and large external shocks are avoided. Which implies that the current obsession in India to limit inflation, by tightening credit and draining liquidity, must be re-examined as acceptable levels of inflation can fuel further growth. “In several countries, higher prices for energy and other primary commodities have contributed to higher revenue for domestic agents, including governments,” the report states. “This has paved the way for an expansion in private consumption and a strong recovery in investment.”

Moreover, with respect to avoiding external shocks, financial markets are seen to be systematically distorting the competitive positions of countries and companies, therefore adoption of policy instruments such as taxation of capital flows and foreign exchange market interventions have been advocated.

Apart from these, regional mechanisms such as agreements on mutual credit and sharing of foreign exchange reserves, in addition to building foreign exchange reserves to cushion against external shocks have also been advised.

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