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Business News/ Politics / News/  Economic growth may fall short of 8% mark, admits FM
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Economic growth may fall short of 8% mark, admits FM

Economic growth may fall short of 8% mark, admits FM

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New Delhi: After sticking to the government’s optimistic projections for ecconomic growth for several months, finance minister Pranab Mukherjee finally admitted on Wednesday that the unexpected rise in oil and commodity prices, monetary policy tightening and global uncertainty are taking a toll on the Indian economy.

As a result, Mukherjee added, it would be difficult for the government to stick to the budgeted fiscal deficit target of 4.6% of gross domestic product (GDP) in the current fiscal, and economic growth could also fall short of 8%.

The minister, however, remained sanguine about the ability of the government to tackle inflation and said it would start falling from December and be around 7% by March 2012. Inflation, as measured by the increase in wholesale prices, was 9.72% in September.

The finance minister said that while the emerging consensus estimate of growth lower than 8% is “disappointing", it should be seen in the context of “the global situation".

Mukherjee desisted from making a formal forecast of economic growth this year. “For that you will have to wait for the mid-year review which I will present to Parliament in early December."

The World Bank said on Wednesday that the country’s economic growth is likely to slow to 7-8% in the next two years. “The slowdown is a result of uncertainties weighing down investment, tighter macroeconomic policies intended to fight still-high inflation, and the base effect of the strong agricultural rebound in FY2010-11," it said.

The bank said slow growth in developed countries meant India would need to look within for growth drivers.

“This would include progress on important structural reforms, and further measures to achieve fiscal consolidation and reorient government spending toward investment and growth," it said. “Even then, risks from the uncertain international environment are high. Policymakers would do well in reviewing crisis preparedness at this time."

Also See | Reality bites (PDF)

Fiscal trouble

Economists have long predicted that government will exceed the deficit target.

Mukherjee admitted that with crude prices remaining high— India subsidizes fuel prices—it will be a challenge to keep fiscal deficit down to 4.6%. Unlike last year, when the government received a windfall from the sale of spectrum for 3G services, there are no auctions scheduled this year.

“So to try to maintain the fiscal deficit, I shall have to try to stick to all the numbers that I had taken into account to compute the deficit. Resource mobilization and expenditure constraint—both measures have to be taken," Mukherjee said.

Kotak Mahindra Bank chief economist Indranil Pan said he isn’t surprised.

“The high oil prices will hit the budget through lower accrual from customs and excise taxes as government has reduced the taxes to fight inflation while it will lead to higher subsidy burden," he said. “Combined with lower accruals from disinvestment, low tax receipt and higher expenditure on subsidies will take fiscal deficit to 5.4%."

The government could still earn Rs30,000 crore by selling part of its stakes in state-owned firms, said Pan, although that depends on what happens in Europe, which is battling a debt crisis.

The government had planned to raise Rs40,000 crore from asset sales in the current fiscal, but it has not been able to make much headway because of uncertain market conditions. So far, it has raised only Rs1,144 crore from stake sale in Power Finance Corporation Ltd. Last fiscal, the government raised Rs22,763 crore through the sale of equity in public sector enterprises.

The inflation dilemma

The Reserve Bank of India (RBI) has raised policy rates 12 times since March last year to curb inflationary pressure. In September, Wholesale Price Index-based inflation fell only marginally to 9.72% from 9.78% a month earlier, raising apprehension that the central bank may raise policy rates again in its mid-year policy review on 25 October. When asked if the RBI should follow the footsteps of the Turkish central bank and cut rates as suggested by chief economic adviser in the finance ministry Kaushik Basu, Mukherjee said, “It is not necessary that one set of prescription followed by one country will be effective in another country in another situation".

“Let us not come to the conclusion that if a certain central bank has accepted certain monetary policy to tackle their problems prevailing at that point of time, other central banks have to follow it. I do not accept that," the minister said.

asit.m@livemint.com

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Published: 20 Oct 2011, 01:15 AM IST
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