Indian economy is not overheated

A vast majority of the country’s top CEOs and CMDs feel India has the capacity to absorb 8-9% growth for a long period

A vast majority of 74% of the country’s top CEOs and CMDs feel that the fast-growing Indian economy is not overheated and has the capacity to absorb 8-9% growth for a long period, provided the supply side is managed well and domestic saving encouraged. The ASSOCHAM Business Barometer (ABB) did a quick survey of 280 CEOs and CMDs from different segments of the industry and financial market and posed them a straight question: Is the Indian economy overheated?

As many as 74% of them said while inflation has remained an area of concern for the government and the policy-makers, it would be far- fetched to come to the conclusion of stating the economy was too much stretched. However, as many as 69% of the CEOs and CMDs polled by ABB survey said a continuous caution was required so that macro-economic stability was maintained to support pick up in investment and growth on a sustained basis.

"Most of the inflation related problems arise because of supply issues related to commodities like wheat and pulses. The answer lies in increasing the productivity and the output of the essential commodities by increasing investment in agriculture", ASSOCHAM President, Anil K Agarwal said.

He said the ASSOCHAM agreed with the forthright views expressed by Prime Minister Manmohan Singh stating that the dismal state of affairs in agriculture cannot be allowed to continue. The root of the inflationary problem lies in the hardening of primary commodity prices. According to official figures, the contribution of the primary articles with a weight of 22.03% in the WPI basket was 28.8% in the 34 weeks until November 18. Within the primary products, a major contribution to inflation was made by cereals; pulses; potatoes, milk, condiments and spices and minerals.

Over 88% of the respondents of the Survey said while in the short-term, the supply of the primary products could be augmented by measures like reduction in customs duty, the answer lies in improving production of these essential commodities by giving a boost to agriculture.

Investment and focused attention in agriculture would not only help the distressed farmers but would also improve the supply side of essential commodities so that the critical question of food security is addressed. "India should again become self-sufficient in food products", the ASSOCHAM President said. While the overall growth in the first half of the current financial year has been 9.1% , agriculture has remained subdued with average growth of 2.6% in the last eight quarters.

21% of the CEOs and CMDs included in the ABB survey did express fear of the economy getting overheated. They argued that besides the mounting problem of inflation , the mis-match between the investment and savings could lead to the problem of overheating. They said it was critical that the country’s fiscal deficit is curbed so that the resources can be better utilized for augmenting production and supplies rather than the money going into non-productive and non-Plan expenditure.

An overwhelming response emerging from the ABB survey was that the Indian economy is not growing beyond its potential . As many as 79% of the CEOs said it would be wrong to state that the 8-9% growth could be straining the country’s labour force and capital stock.

According to the Mid-Year Review of the Finance Ministry, even the current account deficit was not a matter of concern at the present moment. It quoted the Committee on Fuller Capital Account Convertibility indicating that a current account deficit to GDP ratio of 3% could be comfortably financed . The argument was confirmed by the Approach Paper to the 11th Plan While 24% of the respondents said that the RBI measures to curb excess liquidity was a welcome move, the majority of them said the central bank should not do anything that can stunt growth.

Over 89% of the respondents said they saw interest rates further going up and this would have an adverse impact on the industrial growth. The RBI should strike a balance between the growth and inflationary expectations, they said.