Economic growth buoyant amid high inflows challenge

Economic growth buoyant amid high inflows challenge

Union finance minister P. Chidambaram has said India’s economic growth will continue to be robust, but will be accompanied by “short-term challenges of managing high capital inflows" and a sharp rise in global prices of commodities including oil.

In the mid-year review of the economy presented in Parliament, Chidambaram said growth will continue to be driven by industry and services, but “become increasingly competitive". The economy has grown slower by 9.1% in the first half of 2007-08, impacted by tight credit and high global commodity prices, after expanding by a 18-year high of 9.4% in 2006-07.

The high price of power that industry is forced to pay because other sectors such as agriculture pay much less (or not at all in some cases) is affecting its competitiveness by 3-5%, the review said. High infrastructure costs, delays and other transaction costs are other impediments to growth.

Taking credit for the steady “decline in inflation from 6-7% in March to around 3.9% in mid-November, the review said this is because “with the build-up of new capacity, increased supply has caught up with the spurt in demand". Inflation has dipped further to 3.01% in the week to 24 November compared with the same period last year.

On capital flows, the review said while some international experiences involve “successful and painful adjustment process", “the specific Indian context requires innovative policy responses" and would be a major challenge.

Foreign portfolio investment has already reached $16 billion (Rs63,040 crore) in (calendar) 2007, and net foreign commercial borrowings rose 78% from a year ago to $7.05 billion in April and June.

The review also indicated fighting the challenges to growth has been a costly exercise. First, the cost of “sterilizing" dollar inflows by issuing bonds has increased 121% to Rs8,200 crore, compared with the budgeted Rs3,700 crore. And the government’s liabilities have risen by about Rs30,000 crore owing to higher fertilizer subsidies and the unwillingness to pass on increased oil costs to consumers. Most of these are kept out of the main budget because of restrictions imposed on the government by the Fiscal Responsibility and Budget Management (FRBM) Act.

“Our niggling fears come from basic household budgeting that is getting out of hand. And the government is not doing anything much to set this right,"said Sunita Kale, chief economist with Delhi-based research firm Indicus Analytics.

The review admits the government has slipped on all the FRBM Act targets. As opposed to the estimated 45%, the government has already spent 86% of its budgeted expenditure.