We anticipate gross domestic product (GDP) growth to be in the range of 8-9% over the next five years. Agriculture is the segment which needs utmost attention because it still contributes 19% of the GDP and 70% of the Indian population depends on it. But the growth in agriculture has been rather erratic. So the focus should be on giving further fillip to this sector to move the rate of growth from the current 2% to 5-6%.
If crop productivity is improved and agricultural prices remain on a firm footing, this will give a big fillip to agriculture growth. And then we will see the effect of higher agricultural growth resulting in higher farm income and consumption.
As we progress into next financial year, the base effect along with moderation in food prices due to better crops should see inflation coming down to 6%. Moreover, the supply-side constraints should also be removed by that time.
We are also likely to see a moderation in credit demand especially in areas such as housing and personal loans, where credit growth has been high. The current liquidity crunch should also ease, once the demand for credit shows signs of cooling off.
The key challenge for polcy makers is to choose between the two—stamp out inflation and in the process, let economic growth slow down, or temper inflation gently and keep the growth momentum going.
It’s well recognized that, against the backdrop of current infrastructure, which is inadequate the economy is growing at 9%. Improvement in infrastructure can bring a lot of efficiency gains, which can push GDP growth to 10% or more.
We expect the markets to be range-bound for some time now and then pick up towards the end of the year. Indian equity markets are trading at 17 times of the next year’s earnings, with earnings growth expected at 16-17%. Therefore, one could argue that markets are nearing fair valuation. As for risks, one should keep an eye on oil prices, something which both the local as well as global markets are ignoring. Any geopolitical tensions can take back oil prices to their all-time high.
S. Naganath spoke to Rachna Monga after the Economic Survey was presented.