New Delhi: The Indian government on Tuesday enhanced the economic growth projection for 2010-11 to 8.75%, with the possibility it could breach the 9% mark, but warned the situation could be more volatile due to a spillover of Europe’s economic woes and an increase in global food prices.
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In February’s Economic Survey, the finance ministry had projected 8.5% growth for 2010-11 and added it could fluctuate in the range of 0.25% around it.
In the Mid-Year Analysis 2010-11 placed in Parliament on Tuesday by finance minister Pranab Mukherjee, the government raised the growth forecast to 8.75%, but said it could fluctuate in the range of 0.35% around that level.
“Private consumption is becoming the primary engine of growth,” said D.K. Joshi, chief economist of Crisil Ltd. Crisil issued a new forecast for 2010-11 on Tuesday, raising the growth projection by 0.4 percentage point to 8.6%. “In essence, growth is more sustainable now,” Joshi said.
Amid the increase in growth forecasts, the mid-year analysis warned of a simultaneous increase in volatility.
Risks from the external sector account for the enhanced volatility in the economic situation, the mid-year analysis said. The two major risks are slow economic growth on account of Europe’s problems and the firm trend in the price of primary articles.
According to the analysis, the Food and Agriculture Organization’s food index has increased in 2010 to levels last seen at the peak of the 2007-08 crisis. This development could eventually have an adverse impact on India, the analysis added.
The Indian economy has the potential to grow faster than 9% recorded before the 2008 global financial crisis and stay at that level. However, to sustain such levels, there are no easy options and “significant deepening of reform initiatives” is needed.
The mid-year analysis identified two key challenges to keep India on a high growth path and raise it to double-digit levels.
India needs to push forward on consolidating government finances and clean up its governance act to get better outcomes in infrastructure.
“A high fiscal deficit is higher growth foregone,” the analysis said, explaining why the primary macroeconomic challenge is for the government to stick to its commitments on fiscal consolidation.
Mukherjee has said in Parliament that the projected fiscal deficit of 5.5% of gross domestic product (GDP) in 2010-11 would be whittled down to 4.1% by 2012-13. This is to be accompanied by a reduction in the Central government’s debt as a proportion of GDP to 47.6% by 2012-13 from the last fiscal’s 50.5%.
In the long term, fiscal consolidation is best achieved by spending less, the analysis said.
The report also explored India’s challenges in dealing with the fallout of a surge in capital inflows. Research showed controls work for a short period, but then start hindering economic growth. Reforms in the domestic capital market to channel flows into longer-term and risk-bearing assets is an important aspect, the analysis concluded.
The pace of improvement in India’s infrastructure performance is linked, in part, to cleaning up the system, the mid-year analysis said.
“Some of these problems can be overcome if projects are awarded on the basis of transparent and hands-off auction system,” it said, explaining the delays in India’s highways programme.
In absolute terms, between 2012 and 2017, India will need to invest Rs44.9 trillion, the analysis said. This will translate into 9.95% of GDP at the projected economic growth rate of 9%.
India’s investments in infrastructure and economic growth were set in the context of global anxiety over climate change on account of human economic activity.
“At the end of the day, the debate on climate change, though focused upon primarily as an environmental issue, boils down to a debate on economic costs and economic development,” the report said.
It pointed out India had committed itself in international forums to keep reducing its emissions intensity. Emission intensity of India’s GDP has declined by more than 30% during 1947-2007, the report said.