The report underscores that higher growth would depend on a recovery in both agriculture and industry. Industrial recovery, the report says, would be directly proportional to the extent kinks are ironed out in the infrastructure area.

Speaking at the release of the report, senior economist with ADB Klaus Gerhaeusser underscored that low interest rates and easier availability of credit are critical for industrial recovery. The report is, however, not equivalently bullish about India's exports. Gerhaeusser said, "The government's export target of 20 per cent may be too ambitious."

In 1998 the report projects an export growth of amere 7.5 per cent and an import growth of 9.9 per cent with current account deficit pegged at over 2 per cent. The following year, export growth is pegged marginally higher at 7.8 per cent with imports estimated at 11 per cent.

The report remarks that with exports rising more slowly than imports, the trade deficit will widen, leading to a substantially wider current account deficit. In this context it goes to say that the rupee is overvalued, "in light of the Asian currency crisis, the authorities must try to ensure that India's exchange rate remains competitive."

Building an argument for further devaluation of the rupee, the report says, as massive devaluations have occurred in Indonesia, Korea, Malaysia, Philippines and Thailand, the rupee by comparison is "significantly overvalued."

It adds that as few of India's exports compete directly with those of South-east Asia, the currency depreciations have increased the attractiveness of these countries as locations for foreign direct investment andtourism. Further depreciation would therefore be necessary to maintain India's external competitiveness, it says.

The report cautions that interventions by the Reserve Bank of India in the currency market might affect industrial recovery. It says measures such as lowering the cash reserve ratio by 2 per cent in January could choke off industrial recovery by dampening business enthusiasm to borrow funds for investment. "These considerations suggest that the authorities will need to weigh carefully the costs and benefits of supporting the rupee if it comes under renewed pressure during 1998," it warns.

INSIGHT

Limits to growth

The projected GDP growth rate of 6.7 per cent for 1998 assumes a recovery from the stubborn industrial recession. Both industry and agriculture are expected to contribute to accelerated growth, based mainly on home demand. The recovery will give a modest fillip to import growth: 9.9 per cent in 1998 and 11 per cent in 1999 when GDP growth is reckoned to rise to 7 percent. It is a moot point that if the assumed growth rates for imports will be sufficient to sustain the projected increase in GDP. The trouble is import growth cannot be pushed hard because export growth is stagnating reflecting weak external demand. ADB projects exports to rise by 7.5 per cent in 1998 and 7.8 per cent in 1999.