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Economy will grow by only 7.7%: EAC

Economy will grow by only 7.7%: EAC
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First Published: Thu, Aug 14 2008. 12 14 AM IST

Updated: Thu, Aug 14 2008. 12 14 AM IST
New Delhi: A day after the government reported industrial growth had halved in the first quarter of the current fiscal compared with the corresponding quarter in 2007-08, a top advisory body on Wednesday predicted that the country’s economy will expand at below 8%, slower than previously thought. It warned that the rupee could come under pressure, and said the inflation rate was yet to peak and could even touch 13%.
The Prime Minister’s economic advisory council, or EAC, blamed these on the global economic slowdown, tightening credit, falling equity markets and the “regressive effects” of commodity price-led inflation.
The council’s economic outlook for 2008-09, released on Wednesday, projected that the economy was expected to expand by 7.7% in the current fiscal. “Considering the magnitude of the adverse economic developments in 2008, the projected drop from 9% last year to 7.7% this year is, in fact, modest,” the report stated.
“The overall growth forecast by EAC is consistent with our expectations. A lower (2%) forecast for the agriculture sector is due to a higher base last year. If the current trend continues as shown by the growth in industrial production data, the projected 7.5% growth for the industry will be difficult to achieve. However, the services sector may grow close to 10% as estimated, as it is not interest-rate sensitive,” said Dharmakirti Joshi, principal economist at credit rating agency Crisil.
EAC further said that a tight monetary policy stance is necessary to bring down the inflation rate to 8-9% by the end of March.
“It is still possible for inflation to climb further up to touch 13%. By December, we will see a decline,” said C. Rangarajan, outgoing chairman of the council.
The inflation rate, as measured by the Wholesale Price Index, was 12.01% for the week ended 26 July.
The Reserve Bank of India, or RBI, in its policy statement on 29 July had said that a realistic policy endeavour would be to bring down inflation to 7% by the end of March.
The council said that achieving this target would take considerable effort and a confluence of favourable factors.
“A tight monetary policy needs to be maintained in the short run to ensure price stability. However, if inflation rate slows down, then further tightening may not be needed. The question of easing the monetary policy will come in when inflation comes down significantly. How far the policy could be moderated will depend on the set of situations at that time,” Rangarajan, a former governor of RBI, added.
EAC also cautioned that India could face serious fiscal risks from growing off-budget liabilities estimated at 5% of the gross domestic product, or GDP, due to increasing burden of food, fertilizer and oil subsidies.
In effect, this would mean that the fiscal deficit for the current fiscal would be 7.5% of GDP and not 2.5% of GDP as estimated in the Budget.
“The progress in fiscal consolidation shows that both the Central and state governments are likely to overreach the fiscal deficit target while the persisting revenue deficit would remain a matter of concern,” EAC’s report said.
EAC has advised the government to “urgently” increase fuel prices on account of a “large backlog of fuel price adjustments”.
Painting a gloomy outlook on the balance of payments front, EAC said the current account deficit, or CAD, is bound to widen due to increase in the oil import bill. CAD is made up of the trade deficit and the net trade in so-called invisibles, made up largely of remittances and earnings from software exports.
It projects CAD at $41.5 billion or 3.2% of the GDP for the current fiscal, a significant increase from 1.5% of the GDP in 2007-08. This will also be the first time that the country will be recording such a high level of CAD since the 1991 economic crisis.
“We estimate that the CAD/GDP ratio may be above 4.5% in the first and second quarters of 2008-09 and subsequently decline in the last two quarters,” the report said.
While Rangarajan acknowledged that the CAD levels would reach those last witnessed in 1991, he maintained that the circumstances were different because of the country’s foreign exchange assets at $305 billion on 8 August.
Though total capital inflows are expected to decline in 2008-09 to $71 billion, 34% lower than previous year, EAC said this will be “more than adequate” to finance the CAD, adding about $29 billion to foreign exchange reserves.
At the same time, the council cautioned that policymakers should be prepared to face a situation of greater volatility in capital inflows on account of the uncertain external environment.
Experts, however, are divided over the possible impact of a higher level of current account deficit on the rupee, with some claiming that this may force RBI bank to sell dollars and others saying that such a situation may not arise.
“The rupee may stabilize in the Rs41.5-42 range against the dollar by March 2009. Softening of oil prices and cheaper commodity prices will prevent the rupee from further depreciating,” Joshi said.
The rupee closed at Rs42.65 to a dollar on Wednesday.
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First Published: Thu, Aug 14 2008. 12 14 AM IST