PM’s advisors see 9 per cent growth

The Prime Minister’s Economic Advisory Council (EAC) today projected that India’s gross domestic product (GDP) would continue to grow at 9 per cent...

The Prime Minister’s Economic Advisory Council (EAC) today projected that India’s gross domestic product (GDP) would continue to grow at 9 per cent for the current fiscal year but warned that sustaining such high rates may be difficult unless the government overcomes some of the key constraints posed by the farm and power sectors.

In its annual economic outlook report, the Council has pointed out that inflation would remain close to 4 per cent and foreign direct investment (FDI) into the country would swell to $15 billion. For this year, the EAC’s estimates for GDP growth are lower than the 9.4 per cent growth in 2006-07 but higher than the projections of other agencies, including the RBI.

The EAC had projected last year that the overall growth in 2006-07 would “be in the narrow range of 7.8 per cent-8 per cent” but the economy surpassed these expectations to clock a record growth of 9.4 per cent. The three fear factors for the economy are rising crude oil prices, slow farm sector growth and power shortages. On the power crisis, the report points out that the sector “requires completion of reform of the power distribution set up… and encouragement of of large-scale import of power generating plant and equipment to augment domestic production”.

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This prescription assumes significance as EAC chief C Rangarajan has also been entrusted by Prime Minister Manmohan Singh to oversee the problems of the power sector.

Identifying increased capital inflows as a challenge to liquidity management, the Council has suggested that the rupee should be allowed to appreciate further, capital outflows should be liberalised, and restrictions should be imposed on certain capital inflows such as ECBs. “In India, the magnitude of capital inflows and their potential to induce large changes in relative prices will have serious repercussions for domestic business in both the domestic and export markets.” At the same time, the EAC has discouraged any move to limit equity inflows, describing such a course of action “most unwise”. “Equity investment is high risk and policy continuity is an essential element to maintain such flows — it cannot be turned on and off at will,” Rangarajan said. “However, on the debt side, there are some areas that can do with some scrutiny.”