Govt bullish on growth, inflation a big worry

Dr. C. Rangarajan, Chairman, Economic Advisory Council (EAC) to the Prime Minister released the document ‘Review of the Economy-2009-10’ at a Press Conference in New Delhi. Strong rebound in the second half of FY 2009-10, especially industry, drove growth rate upwards. The output in the agriculture sector is much better than feared earlier, in part due to proactive measures by the Government.

The EAC projected GDP growth rate of 7.2% in FY10, 8.2% in FY11 and 9.0% in FY12. For the current fiscal year, the EAC sees Agriculture sector de-growing by 0.2% (1.6% in FY09) while Industry (including Construction) will expand 8.6% (3.9% in FY09), Services will grow by 8.7% (9.8% in FY/09). India's FY10 GDP growth rate may be even higher than the 7.2% estimated by the CSO, driven by strong revival in manufacturing and construction.

On the external front, the EAC said that developed countries have come out of recession but the recovery is still fragile with downside risks to growth. Financial markets are nervous about fiscal sustainability. Several advanced countries have seen worsening of budgetary positions. There is speculative pressure on commodity prices, especially the sharp rise in crude oil prices.

As far as Inflation goes, the EAC said that There is danger of significant transfer of food price inflation to the general price level in 2010-11. Risk to inflation may also arise from rising international commodity prices, it added. In the short run, the Government must ease supply by increased distribution from stocks and in the medium term by improving productivity. Energy index and manufacturing goods index (ex-Food) did not rise much for most of 2009-10 but are now moving up.

Recovery in the Indian economy necessitates a more neutral monetary policy, the EAC said. Future RBI action will depend on pick up in credit, liquidity conditions and further pressure on prices. Large revenue and fiscal deficits of past two years are clearly unsustainable, the EAC said. It is possible to reduce fiscal deficit of the Centre by 1.0-1.5% in FY 2010/11. The EAC also said that it is feasible to reduce expenditure-GDP ratio by 1%.