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An upbeat note on the economy

In predicting a GDP growth rate of 9 per cent for this year, the Prime Minister’s Economic Advisory Council headed by C. Rangarajan, is more optimistic than other institutions. On inflation too, the recently released Economic Outlook 2007-08 is upbeat: it expects the Wholesale Price Index to be contained at below 4 per cent. The Reserve Bank of India in its annual credit policy review had forecast a growth rate of 8.5 per cent and inflation at 5 per cent. The Nationa l Council of Applied Economic Research’s growth estimate is even lower at 8.3 per cent. The Economic Advisory Council has based its optimism on the behaviour of the South West monsoon so far and the generally favourable global environment. If its forecast comes true, the economy would have grown by 9 per cent for three years in a row. But, both industry and services, the main growth drivers, are expected to slow down marginally to 10.6 per cent and 10.4 per cent respectively and agriculture is expected to register a 2.5 per cent growth. There are uncertainties however. The report card on the monsoon is not complete. The final picture will not be available with regard to its quantum or the spatial distribution until much later. It is not clear whether the inflation estimates would hold in the context of the recent surge in global oil prices. The rising rupee has forced the government to grant exporters a package of sops costing Rs.1,400 crore. Almost certainly the merchandise export target of $160 billion set by the Commerce Ministry will have to be scaled down. Software companies too are feeling the impact of the strong rupee on their gross margins.

The Economic Outlook reckons that the government will not be able to achieve the targets set under the Fiscal Responsibility and Budget Management Act by 2008-09. The release of the Sixth Pay Commission report would add to the fiscal worries. In what is bound to become the framework for future policy debate on capital inflows, the report has recommended curbs on external commercial borrowings that rose sharply to over $16 billion last year from just $2.72 billion in 2005-06.While non-resident Indian deposits too are to be discouraged, the Economic Outlook would leave the equity flows, whether as portfolio or as direct investment, untouched. The RBI could mop up to $25 billion out of an estimated $57 billion and add to reserves without breaching the domestic money supply target of 17.5 per cent. Although it might be possible to contain the current account deficit within 1.5 per cent of the GDP, the widening trade deficit and the consequences of certain types of debt flows are major areas of concern.

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