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The slowdown in perspective

In its latest review of the economy, the Prime Minister’s Economic Advisory Council (EAC) makes no deviation from what it said six months ago in the Economic Outlook about the broad trends. But it has sharply focussed on some disquieting developments in India and abroad. The EAC’s forecast of a growth rate of 8.9 per cent for this year, though at the upper end of its earlier forecast range, might still disappoint those who have come to expect a minimum annual g rowth of 9 per cent. By most yardsticks a growth rate of nearly 9 per cent is impressive. Yet in the current Indian context, even a slight drop would be seen as a pointer to a gradual slowing down of the economy. During the first two quarters of this year the economy has grown by 9.1 per cent, as against 9.9 per cent recorded over the same period in 2006-07. The EAC is not off the mark when it suggests that the pace of economic acceleration that began five years ago might be losing some steam. The non-farm sector comprising industry and services which has provided the stimulus appears likely to grow steadily at 10 to 10.5 per cent. The good news is that the farm sector has shown a distinct improvement recently, registering a 3.5 per cent growth in all the three previous quarters.

In the opinion of the EAC, the economy is resilient enough to overcome any slowdown. There are major infrastructure constraints holding back industrial output. Although the southwest monsoon has been good, weather-induced fluctuations in farm output are likely to affect the GDP level. A bigger threat has emerged from the global environment — for instance, the sub-prime housing mortgage crisis in the U.S. The EAC however feels that the Indian economy is less vulnerable than China’s. For all the emerging economies including India’s, inflation remains the biggest threat. Although currently headline inflation is below 4 per cent, there can be no room for complacency. There has been no let-up in the surge in prices of oil, industrial raw materials, and food items, especially wheat. Above all, there are problems associated with surging capital flows and the consequent rupee appreciation. These negative trends notwithstanding, the EAC expects the economy to settle down to a growth rate that is above 8.5 per cent and closer to 9 per cent per annum.

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