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Business News/ Home-page / PM’s council urges rapid action on economic policy
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PM’s council urges rapid action on economic policy

PM’s council urges rapid action on economic policy

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New Delhi: The Prime Minister’s economic advisory council (EAC) on Monday made a strong pitch for liberalization measures aimed at stemming the erosion of investor confidence in order to get the economy back to the trajectory of 9% growth.

EAC said that the government, under pressure because of a series of corruption allegations, needs to act quickly on the policy front to end the paralysis that threatens to hobble growth even further as the fiscal deficit looks set to grow with several big-spending programmes on the horizon.

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It called for allowing 49% foreign direct investment in all sectors except prohibited ones, speeding up the implementation of the goods and services tax, and removing constraints on land acquisition and environmental clearances.

Also See | Muted Estimates (PDF)

Releasing its annual Economic Outlook for 2011-12, the council headed by C. Rangarajan said India’s economic growth is “unlikely to exceed" 8.2% in the current fiscal, which is a significant reduction from its February projection of 9% growth. The growth projection is higher than the forecast by the Reserve Bank of India (RBI) of 8% and lower than a revised growth projection by the finance ministry at 8.6%.

“The reduction would primarily be on account of industry, which is now forecast to grow by 7.1%, down from the estimate of 9.2% made in the February 2011 review," the council said.

The causes of the investment slowdown are well-known, said Samiran Chakraborty, head of India research at Standard Chartered Bank.

“However, the fact that the Prime Minister’s EAC is making a case will put pressure on the government to act fast on these issues," he added.

Chakraborty said the estimate of 8.2% may be difficult to meet. “The projection that services will grow at 10% seems optimistic. As industry slows down, services linked to the industry sector will also moderate," he said.

The assumptions behind the current projection are that there will be a reasonable monsoon and that the external economic environment will not deteriorate from what it is today, Rangarajan said.

“If it deteriorates further, there will be a problem," he added.

Saumitra Chaudhuri, a member of the council, said he expects Brent crude to remain at its current level of $117-118 (around 5,150-5,190) per barrel for the rest of the current fiscal year.

EAC said the tighter monetary conditions followed by RBI to contain inflationary expectations will have an impact on demand for housing and consumer durables, in turn impacting economic growth.

Though economic turbulence in Europe and the US may have constrained India’s economic growth, the council said it is “not (a) good enough reason to explain why we have not been able so far to do better than we have".

“What happens overseas is outside our control and we must take it as given," EAC said. “However, over what happens at home, we have much more control. It is absolutely imperative that active measures to improve the investment climate be taken."

This includes the removal of uncertainties on both policy and administrative fronts and taking measures to strengthen the competitive character of the market, it added.

The council said the government should have pushed through reforms by rolling out physical infrastructure and improving efficiency in public expenditure in the social sector in order to restore the high rate of asset creation and economic growth.

“The combined momentum of a stable government after the May 2009 general elections and the successful navigation through the crisis was a good opportunity to take those necessary steps to energetically get back to the imperatives. However, we have lost time," it said.

Explaining why economic reforms lagged behind, the council said hubris was to blame. There was “clearly considerable over-confidence" in both business and in government as India came out of the 2008 economic crisis relatively unscathed.

EAC said there was a disinclination to roll back fiscal and monetary stimulus packages quickly while the flaring up of inflation in food and thereafter non-food items made it difficult to focus on broader policy initiatives.

The council added that the spate of corruption-related controversies that has emerged over the past one year has consumed the energies of the government and has led to an unintended slowing down of initiatives to restore investment and economic confidence.

Although primary food inflation has been at 8.4% in May and June, the council said it still remains at a fairly high level and a possibility of a surge clearly exists, “especially if fears about rainfall adequacy in the current monsoon season begin to feed back into prices". Even though the non-food manufactured inflation has moderated to 7.3% in June, EAC said the decline has been offset by an increase in the inflation rate of manufactured food items, particularly that of edible oil, processed tea, coffee and sugar.

The council, however, expects inflation based on the Wholesale Price Index to slow to 6.5% by March-end, even though it may remain elevated at 9% till October.

The central bank recently in its first quarter policy review said inflation may slow to 7% by end-March.

Rangarajan said further action by RBI,which has increased the policy rate 11 times since March 2010, will depend on how prices behave.

“Unless inflation shows definite signs of decline, the current cycle of rate hike may continue," he said.

The council maintained that achieving the fiscal deficit target in the 2011-12 budget will present a “significant challenge" and calls for structural reforms in the finances of the Centre.

The finance ministry has projected a fiscal deficit of 4.6% of gross domestic product (GDP); the council expects it at 4.7%, including some off-budget liabilities.

“In the short term, the challenge in the case of the Centre is rising crude oil prices, which are creating an upward pressure on the subsidy bill while lower taxes on crude and diesel are impacting revenues," it said.

Standard Chartered Bank’s Chakraborty said the projection that the government could meet its fiscal deficit target was optimistic. “We are looking at a fiscal deficit of 5.4% of GDP," he added.

In the medium term, several items of social sector legislation such as the expansion of universal education to the secondary level, universalizing healthcare and the expansion of food security will place a huge financial strain on the government, EAC said.

“It is imperative for the government to undertake expenditure reforms and initiate steps to increase revenues," it said.

The council projects export growth to moderate in the second half of the fiscal year from 46% in the first quarter (April-June). It expects merchandise exports to touch $330 billion, growing at 32% over the previous year. Portfolio inflows are also likely to be lower in 2011-12 at $14 billion, from inflows of $30.3 billion in the previous year due to tensions in international financial conditions.

Graphic by Sandeep Bhatnagar/Mint

asit.m@livemint.com

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Published: 02 Aug 2011, 01:12 AM IST
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