People around the country are confused and uncertain about what is happening with the economy. Are the reforms really effective? Is the government serious about making the economy better? Can we confidently make plans and investments or should we tighten our belts and prepare for lower incomes and higher unemployment?  

These are the questions that are troubling people. I believe that the economy is fundamentally sound: we have a large technological base, our agriculture is modernizing, we are adapting to an open trading environment, our foreign currency reserves have hit a new record of $26.84 billion (on December 24, 1998), the rupee's external value is relatively stable and foreign debt-service is within manageable limits. We have a large domestic market capable of generating growth. Therefore, political and not economic factors lie at the root of our present economic uncertainty. That is why investors are shy at the bourses and new projects are being postponed. 

Statistics reveal the perceptions of the people. Gold import has grown to record levels in recent months ($5 billion in 1998-99). This is due to the liberalization of gold imports. The real reason is that domestic demand for gold has doubled from 405 tonnes in 1993 to 800 tonnes in 1998. Policy makers must worry about this because they know that gold is the traditional hedge against inflation and bad times. So, are people buying more gold now because they perceive an inflation and a recession?   

Economic trends are the agglomeration of the perceptions of the population. Yet, there are encouraging indicators. Though privatization has not advanced as much as it should have, the government today has less control over the economy. This could be the greatest benefit of all. But it cuts the other way, too. At the first hint of economic trouble, we can no longer hide behind the governmental skirt: we are becoming more accountable for our performance!  

The concern about the prices of key commodities has brought another aspect of the economy to the fore: the government simply does not have as much control over the prices. The only effective control in a market-driven economy is a balance between supply and demand. And an effective way of balancing that is to allow free competition in all sectors. 
 
With this backdrop, what does 1999 promise? The prognosis for the economy is good. And will be better if the government is able to pass the pending economic legislation. Economic growth will resume and with it the prospects of increased investment and job creation.
 
Secondly, we will consolidate our initial position as the world's first trader in the euro. Our exports to Euroland will increase provided we implement a cogent euro pricing strategy. This will provide stability to the rupee-dollar rate. Inflation will stay in single digits and lower the interest rates.
  
The economic effect of political uncertainty and corruption is that of a huge tax on the people: a tax that is collected not to finance development but to fulfill the cost of carrying political establishment. The tax is in essence a diversion of resources from the savings and income pool of the people of the state. 

Capital markets are more transparent today; this has contributed to short-term foreign investments by foreign institutional investors (FIIs). The FIIs have become major players in the market. The FIIs have professionalized capital market-related activities like equity research. It has forced companies to become more concerned about the implications of their performance on share value. The economy therefore has larger segments that are driven by performance rather than collusion and 'fixing'. In that sense, information arbitrage is no longer easy or painless. By information arbitrage I mean the use of public and privileged information to make private gains.
  
The economy is today much more open to the rest of the world. Foreign trade is less shackled by controls and licenses. This is important because trade is the handmaiden of investment. If foreign direct investment (FDI) is to pour in then trade liberalization is the channel. As a founding member of the Marrakesh Agreement and WTO, we have cleared the path for FDI, which is a national imperative for attaining prosperity. 

Thirdly, information arbitrage will be curtailed if the government's information monopoly is diluted and the introduction of an e-government like in Andhra Pradesh. 
 
So, 1999 promises to be an exciting year. But again we must return to the basic question: will the political establishment allow us to attain our potential? I would say that we need to break free from the stifling embrace of politicians. Perhaps we must put in place a constitutional definition of the limits to government's control over the economy. We must slap a constitutional duty on the government to provide a social safety net for those of whom the magic of the markets do not work. Perhaps then India will break out of the ranks of the also-rans and stake its claim for global leadership!