New Delhi: The economists who advise Prime Minister Manmohan Singh have said in a new report that economic growth would rebound in the second half of the next fiscal and hinted that the government has room to increase spending to support the economy.
The Prime Minister’s economic advisory council (EAC), headed by Suresh Tendulkar, expects the Indian economy to expand between 7% and 7.5% in the next fiscal, against the consensus view that growth will be sluggish in 2009-10 as well. Investment bank Goldman Sachs, for example, reiterated in a report released on Friday that India will grow at 5.8% in the next fiscal due to “rapidly falling external demand and slowing investment demand”.
However, EAC says growth in the current fiscal will be slower than it has earlier projected, at 7.1% rather than 7.7%. Growth will rebound due to a “recovery in global economic and financial conditions and the offsetting measures that are taken in India through a combination of monetary, fiscal and other measures”.
The Reserve Bank of India has cut interest rates and the Union government has increased spending to bolster growth. The EAC has admitted that the fiscal deficit of the Union government may?be?around 8% of gross domestic product, or GDP, the value of national output. The finance ministry had budgeted for a deficit of 2.5% of GDP in February 2008. With state governments expected to report fiscal deficits of 3.5% of GDP, the council expects the combined deficit of all levels of government to cross into double digits, one of the highest in the world.
Yet, the council has argued that the government can let the deficit rise. “The cost of sticking immediately to the Fiscal Responsibility and Budget Management Act is very high. It is neither feasible nor desirable. Given the fact that private investment is sluggish, (higher) fiscal deficit is unlikely to crowd out such investment,” Tendulkar said. The Act is a federal agreement to limit deficits by 2009.
Falling crude oil prices will reduce the food and fertilizer subsidies that the government had to pay in 2008 to protect domestic consumers and thus take some pressure off its budget. The EAC also expects inflation to drop and the current account deficit—a measure of external imbalances—to shrink, though the foreign capital inflows needed to finance the latter will be weak.