The latest inflation data shows that wholesale prices are going up at the fastest rate in seven years. This is a good time see how the Indian economy today compares with where it was in the middle of 2001. This could give us some sense of how prepared India is to deal with global shocks.
The good news: India’s economy is growing almost twice as fast as it did seven years ago. One reason is that savings and investment rates have soared. The other is that India has become a more open and competitive economy over these years.
But there is bad news as well. Many indicators of macroeconomic health have deteriorated. Money supply growth is way beyond safe levels. The combined fiscal deficit of state and Central governments is almost at the same level it was at the end of 2000-01. And, while India had a very modest current account deficit seven years ago—and we had a surplus in a few later years—the external gap is now growing.
But there is insurance. Foreign exchange reserves are eight times higher—a strong first line of defence.