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A realistic picture

The Prime Minister’s Economic Advisory Council (EAC), in its Economic Outlook for 2008-09, has painted a more realistic picture of the economy than what emerges from the periodic announcements of the government. Its projected GDP growth rate of 7.7 per cent is in line with several other forecasts which are in the range of 7.5-8 per cent. The economy grew at an average of 8.8 per cent during the past five years, touching 9 per cent last year. During this year, the Indian economy has been growing at a rate well below what was indicated by recent trends. Yet, it will still be among the top performing economies of the world. There has been a distinct slowdown in the global economy. Practically all countries including India have shown a readiness to sacrifice growth for containing inflation. Global factors — the food and fuel inflation and the financial sector crisis — are in fact responsible for both the economic slowdown and the raging inflation. Despite the recent fall in the prices of petroleum and other commodities, inflationary expectations are running high in India .The WPI, now ruling just above 12 per cent, might cross 13 per cent before settling at 8-9 per cent by March 2009.

Agriculture growth rate is projected to drop sharply to 2.0 per cent from 4.5 per cent in 2007-08. Non-farm sector GDP is also expected to grow at a lower rate of 8.9 per cent, compared to 10 per cent last year and 11 per cent in 2006-07. The economy as a whole continues to face serious supply constraints especially in physical and social infrastructure. A major cause for concern is the expected fall in the savings rate triggered by lower public sector savings and erosion of corporate margins. With the investment rate expected to remain steady, the current account deficit representing the rate of net absorption of foreign savings will go up significantly — it is likely to expand to 3.2 per cent of the GDP, a big jump from 1.5 per cent in 2007-08. Even though total capital inflows for this year are expected to be 34 per cent lower, they will still be sufficient to make up the deficit. Although the Centre and the States have moved towards fiscal consolidation, there are risks arising from higher liabilities — budgeted as well as off-budget —notably, the farm loan waiver, food and fertiliser subsidies, and implementation of the Sixth Pay Commission report. These could amount to 5 per cent of the GDP over and above the budgeted fiscal deficit of 2.5 per cent, and need to be watched before finances spin out of control.

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