The new fiscal year begins from today on an overall optimistic note. The fears that gripped the Indian economy this time last year have receded: Economic growth has recovered, share prices are close to a two-year high, fears of job losses have dissipated, companies are once again investing in new capacity, foreign trade is no longer shrinking and consumers are spending.

The economic recovery has brought some other concerns to the fore: accelerating inflation, withdrawal of the tax cuts announced in the early months of the downturn, prospect of higher interest rates, an appreciating rupee and the ever-present threat of a double-dip recession in the West.

Illustration: Jayachandran / Mint

The coming 12 months will present national and business leaders with two sets of challenges. The immediate challenge will be to ensure that the gradual withdrawal of government support to domestic demand does not harm growth, which in turn depends on a continued revival in demand from the private sector.

The main driver of this should be corporate investment, which had ground to a halt during the worst moments of the global financial crisis. A recent Citigroup report said Indian companies would end the current fiscal year with positive free cash flow, which means that their operations are generating more cash than is being absorbed by investments in capacity. This could change in the year ahead, though it is still unclear to what extent rising interest rates will harm the investment revival.

There will be another set of challenges as well, mostly in the realm of public policy. India needs to move quickly on some fronts if it has to secure the base for future economic growth. There are three areas where determined action will be required in fiscal 2011—roads, power and telecom (more specifically the introduction of 3G services). Prime Minister Manmohan Singh recently said that India needs to invest $1 trillion in infrastructure in the next five years, double the amount that was till recently mentioned in policy circles. The new fiscal year will be a good time to start.

Meanwhile, the government must surely be aware that this year is remarkably free of political pressures, since there are no major elections other than the one in Bihar. Reforms have been put on the back burner since 2004, and it is high time the second Manmohan Singh government pushed through overdue reforms in important sectors such as retail, banking and insurance.

Counter-cyclical fiscal and monetary policies helped India come out of the global downturn relatively unscathed. This is a good time to build on that success.

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