New Delhi: A revival in farm output in the next fiscal will help the Indian economy move closer to the growth rate it clocked in the boom years, even though financial market instability and rising prices could pose significant threats to growth, the Prime Minister’s economic advisory council (EAC) said on Friday.
Graphic: Yogesh Kumar / Mint
The economists’ panel also called for a gradual withdrawal of the fiscal and monetary stimulus that has helped the Indian economy weather the global economic storm.
The government will announce its annual Budget on 26 February and the Reserve Bank of India (RBI) is expected to announce its next interest rate move at the end of April.
The advisory council expects the economy to grow at 8.2% in the next fiscal and may return to its trend growth rate of 9% by 2011-12. The Central Statistical Organisation (CSO) has estimated economic growth of 7.2% in the current fiscal.
EAC’s growth forecast for the next fiscal hinges on a revival in farm output, which is expected to grow at 5% compared with the estimated 0.2% contraction in the current fiscal, assuming a normal monsoon this year.
However, it has projected only marginal improvement in growth in both industry and services in the next fiscal over the current year. In 2010-11, industry and services sectors are expected to grow at 8.7% and 8.8%, respectively, compared with 8.6% and 8.7% growth estimates for the current fiscal.
However, EAC fears that the spread of food price inflation into the general price level might occur in 2010-11, if inflationary expectations are not managed properly. It also said that high volatility in financial markets and weakness in major currencies have encouraged investors to hedge their bets by investing in commodities.
“India and China, as well as several other developing countries are showing strong signs of growth and their elevated domestic demand in combination with unsettled financial conditions has the potential of causing commodity prices to rise further,” the council said in its report.
Holding that high food inflation is a cause for concern, EAC chairman C. Rangarajan said the government should ensure that food prices are brought under control. “For this, advanced planning for timely import (of food items) and supplementary distribution channel along with the public distribution system is needed,” Rangarajan said. However, he hoped that food prices would moderate within the next two-three months.
Graphic: Yogesh Kumar / Mint
The council maintained that the India economy has rebounded from the global crisis and is now operating under vastly improved circumstances that can be considered to be “normal”. This necessitates that monetary policy revert to a more “neutral” stance from the excessively accommodative position it had adopted in response to the economic crisis, it said. “Further action by RBI will depend on credit growth, liquidity situation as well as price situation,” Rangarajan said while releasing the council’s report.
EAC asked the Union government to begin fiscal consolidation in the coming Budget in order to ensure fiscal sustainability, enable greater flexibility in monetary policy calibration, contain interest payments and to avoid an upward pressure on interest rates. However, it maintained that as more pressure on the government exchequer has come from increase in expenditures than from tax cuts, corrective measure must focus on adjusting revenue expenditure.
The council maintained that with adequate fiscal adjustment, it would not be difficult to reduce the Centre’s fiscal deficit by 1-1.5% in 2010-11, without any adverse impact on economic growth.
“We should strike a balance between the need for growth and fiscal consolidation. Fiscal deficit between 5.3% and 5.8% would meet both ends,” Rangarajan said.
EAC also spoke of the need to unify the threshold and rate structure of Cenvat (Central value-added tax) and services tax to introduce the proposed goods and services tax (GST) at the Central level.
Rangarajan said some duty hike is desirable (in the Budget). “We can use this opportunity for transition towards GST,” he said.
M. Govinda Rao, a member of EAC, said that both rates could be unified at 10%.
To fast-track the introduction of GST, the council recommended that the Union government should immediately put in place a centralized agency to track inter-state transactions, and function as a clearing house. “This will also help in the computerized information system for central GST,” it said.