Macroeconomic reforms: Risks, flash points and the way forward

This Working Paper examines India's growth and employment generation performance over the last ten years in the context of key indicators such as fiscal and current account balances and inflation and suggests priorities for macroeconomic reforms. An improvement in the central Government's finances is seen as a critical pre-requisite but that this should not be achieved on the back of reducing capital expenditures. The Paper reviews the distorted nature of India's labour markets and recommends legislative and the other steps needed to work around constraints. The need for India to widen its relatively narrow tax base is highlighted in the paper. The Paper also indicates the steps which are required to improve the Public-Private Partnership model and how to enhance the probability of crowding-in private investment into the infrastructure sector. The factors which have inhibited the development of Indian bond markets including the shortcomings in the Government Rupee yield curve are explained in the Paper. The Paper reviews the possibility of capital flight and Rupee exchange rate volatility due to an overvaluation of the Rupee's real exchange rate and assesses the quality of India's foreign exchange reserves. This Paper's review of the Indian economy and corresponding reforms takes the global economic environment into account, particularly anticipated developments in G7 countries.