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Economy to grow at 9% next year

Economy to grow at 9% next year
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First Published: Tue, Mar 01 2011. 01 15 AM IST
Updated: Tue, Mar 01 2011. 02 51 PM IST
The budget says faster growth could accrue from higher capital formation given the levels of incremental capital output ratio of 4.1% estimated for the 11th Plan. But economists say the growth projection in the budget is highly optimistic
New Delhi: Pinning its hopes on a normal monsoon and a pick-up in services sector growth, Budget 2011 on Monday projected the economy to grow at 9% in the next fiscal, higher than the estimated growth rate of 8.6% in the current one.
However, it cautioned that the downside risks to growth are sub-normal monsoons, a sharp rise in commodity prices, particularly in the case of crude oil, and the emerging global economic situation, particularly in advanced economies in the absence of fiscal stimulus.
Also See 2011-12 Projections (PDF)
After factoring in the estimated inflation of 5% during 2011-12, gross domestic product (GDP) growth at current market prices for 2011-12 is estimated at 14%, resulting in a nominal GDP of Rs89,80,860 crore.
Separately, GDP data released by the Central Statistics Office showed economic growth slowing to 8.2% during the quarter ended 31 December due to a slump in manufacturing and community services. In the previous two quarters, GDP grew 8.9%.
In its macroeconomic framework statement, the government said the recent deceleration in industrial growth is more in the nature of “road bumps” and not structural. The Index of Industrial Production (IIP) has been decelerating after peaking at 16.78% in January 2010. In December, IIP grew at 1.6%.
Economists said the growth projection in the budget is highly optimistic. “We expect GDP growth to slow down to 8.3% and slippage in the fiscal deficit to 5% of GDP next fiscal,” said D.K. Joshi, chief economist at the Crisil Ltd. The budget has projected the fiscal deficit to come down to 4.6% of GDP in the next fiscal from the revised estimate of 5.1% of GDP in the current fiscal ending 31 March.
“The projections in the budget are based on optimistic assumptions about growth and conservative estimates of subsidy,” Joshi said. The budget has allotted Rs1,43,570 crore as a subsidy on major heads such as food, fertilizers and fuel.
The budget raised the foreign institutional investor (FII) limit for investment in corporate bonds in the infrastructure sector to $25 billion from $5 billion earlier, which analysts said will augur well for economic growth by resulting in a higher fund flow to the infrastructure sector and making financing of the current account deficit more durable.
The fiscal policy strategy statement presented in Parliament along with the budget said better-than-expected growth in the current fiscal has reinforced the belief in the strategy adopted for fiscal consolidation with a calibrated exit from expansionary measures. However, the government cautioned that the pressure on the inflation front has to be dealt with in a focused manner, identifying it as a major threat for achieving higher growth.
“On the one hand, the government has to ensure that the continuance of recovery is aided through policy actions, and at the same time the growth trajectory has to be balanced with the rising concern on inflation,” the fiscal policy strategy statement said.
With the ripple effects of the global crisis dissipating, the outlook for the medium term remains bright, it said. After factoring in a medium-term inflation expectation (of 5%), the budget estimated GDP growth at current market prices at 13.5% for 2012-13 as well as 2013-14.
Joshi said the mid-term target of growth could be achieved if tax collections rise sharply. “The implementation of the goods and services tax will also help,” Joshi added.
The government in its medium-term fiscal policy statement said it would be possible to get back to the pre-crisis level of tax-to-GDP ratio with the economy reverting to the path of the trend growth rate. Among medium-term targets, gross tax collection as a percentage of GDP is projected at 10.8% in 2012-13 and 11.3% in 2013-14. The gross tax-to-GDP ratio, which increased to an all-time high of 11.9% in 2007-08 riding on a high growth trajectory, has sharply declined to 10.8% in 2008-09 and 9.5% in 2009-10.
The budget said higher growth could accrue from higher capital formation given the levels of incremental capital output ratio of 4.1% estimated for the 11th Plan.
“In the next 5-10 years, capital formation will be important and once the economy begins to operate close to its capacity, skill development and innovation activity in the country are expected to replace savings and investment rates as effective drivers of GDP growth,” the macroeconomic framework statement said.
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First Published: Tue, Mar 01 2011. 01 15 AM IST
More Topics: Budget 2011 | GDP | Monsoon | Price | Inflation |