The year is ending on a euphoric note and it would be politically incorrect to detract from it. If a man from Mars were to go through the comments reported in our business papers, he would be forgiven for imagining that there are no issues like poverty and illiteracy which should be worrying policymakers even as they wallow in the feel good factor. So at the risk of being a bit of a spoilsport, it is necessary to identify what could puncture the balloon.
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First, a speculative element is clearly getting built into the buoyant elements all round. Despite the stock indices having risen spectacularly in the last few months, fresh money is coming into the stock markets in anticipation of institutional investors pouring in more money in the New Year.
They may but it is disconcerting to find that a major exercise driving the market is second guessing the FIIs. The price earning ratios for most sectors have not yet climbed to dizzy and dangerous heights but little of the fresh investment is being made in pursuit of better corporate earnings and such long-term considerations.
If Indraprastha Gas can start trading at 100 per cent premium to the issue price then who needs to wait for anything longer than commencement of listing to book a gain. If we add to this the fact that gold is at an all time high and property prices are sprinting again, you have the makings of a feel good factor that has stopped looking at fundamentals.
There is nothing wrong about betting on sustainable trends but everything wrong when a dizzy climb is fuelled by those whose aim is to make a quick entry and exit.
In the real economy, industrial growth is still monumentally pedestrian and there will be good agricultural growth this year only because the monsoons didn't fail as they did last year. There is substance in the likely good performance in the services sector, enabled by growth in telecommunications, financial services, tourism and software.
But services account for only half the national income. Karnataka classically illustrates what happens when growth in services (mostly software), takes place to the exclusion of all else. In the last couple of years services-led aggregate growth of the state domestic product masked a drought induced decline in agriculture. So you have an instance of acute rural distress and overflowing prosperity in Bangalore.
The cause of concern for the country's macro managers should be the creeping inflation. The rate is now getting close to 6 per cent, with few claiming that it will get better as the winter ends and food prices start to go up.
A key element in the price rise is fuel prices, over which India has little control and nobody is forecasting that global oil prices will go down as the New Year progresses. If declining oil prices are predicated on peace and stability returning to Iraq, thus allowing the country to produce its share of oil, then it would be sensible to assume oil prices will remain high.
The second element in the creeping inflation is the rise in the prices of manufactures. The annual inflation rate for manufactures is at an eight year high! Commodity prices are also buoyant, meaning climbing and likely to keep doing so.
There is a clear case for getting down to taking some corrective measures. Adopting classical deflationary measures like hiking interest rates to rein in liquidity is not the answer. We know what the tight money policy did from 1996 onwards. But there is a way out. The rupee can be allowed to float up much more, without seeking to keep it pegged by buying dollars, thus adding to reserves and excess liquidity, which then becomes a headache.
Further rise in the rupee against the dollar will be par for the course as the dollar is at a historic low and most Asian currencies have till now appreciated more against the dollar than has the Indian rupee.
The greatest beneficial effect of a rising rupee will be falling import prices and a downward pressure on the inflation rate. This will encourage further imports, force Indian business to be more globally competitive and encourage the import of plant and machinery, thus leading to quicker upgrading of internal technology levels.
The one sufferer in this will be exports but that is likely to be only in the short run. As an appreciating currency extracts greater competitiveness out of domestic business, exports will recover after a time. The level of reserves can well take care of a temporary fall in the export growth rate.
It is not as if the present feel good factor does not have any legitimate foundations. A key long-term gain is the increasing efficiency and confidence of the Indian corporate sector. The global acquisitions being made by leading India companies, as also the rising share of their revenues coming from global earnings bear testimony to this.
But most of their share prices are already ruling at fairly high PEs. If the share prices of the likes of Infosys, Ranbaxy and Asian Paints cannot go up much further in a sustainable way, you ought not to be buying into stocks or equity based mutual funds. The under-performing stock is becoming an increasing rarity.
The positive economic sentiments have also been aided by a string of important legislations being passed by Parliament over the last few sessions, thus giving a boost to reforms. The best example is the power sector in which things seem at last to be happening courtesy the new electricity act.
But if next year is going to be an election year, then surely reforms will be put on hold for some time. While there is much to be happy about and the foundations of a robust economy are being painstakingly laid, some of the effervescence in the stock indices and sprint in property prices are unsustainable. A couple of little bubbles are beginning to get formed. Beware!Powered by 
