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Economic Advisory Council presents grim growth report

NEW DELHI: In a grim foreboding on the price front, the Prime Minister’s Economic Advisory Council (PMEAC) on Wednesday projected the inflation rate to touch 13 per cent in the near term. It expected a slide in the GDP (gross domestic product) growth to 7.7 per cent this fiscal from a high of 9.1 per cent in 2007-08.

Releasing the council’s ‘Economic outlook for 2008-09’ at a press conference here, its outgoing Chairman C. Rangarajan said: “For some more time, inflation can increase. It could touch 13 per cent... but by December, it will start declining and is likely to moderate to 8-9 per cent by March 2009.”

In agreement with the Reserve Bank’s tight monetary policy prescription to contain inflation — which has already touched a 13-year high of 12 per cent — Dr. Rangarajan said: “It [inflation] could be brought down to 8-9 per cent by March 2009 through coordinated policy action…The tight monetary stance needs to be maintained till the pace of inflation comes down.”

Explaining the PMEAC’s rationale for lowering its projection on economic growth for 2008-09 to 7.7 per cent from a healthier 8.5 per cent forecast in this January, Dr. Rangarajan said: “There is a slowdown in agriculture, industry and services and the global environment is not very conducive to growth. This will affect [the] Indian economy as well.”

In a more optimistic note, however, Finance Minister P. Chidambaram sought to indicate that the council’s projection on GDP growth was conservative. Briefing journalists after his meeting with chiefs of public sector banks (PSBs), Mr. Chidambaram said: “If the PMEAC pegs GDP growth at 7.7 per cent, I can confidently say it will be close to eight per cent.”

According to the PMEAC, the farm sector growth is likely to decelerate to two per cent during the current fiscal compared to the 4.5 per cent increase achieved in the previous fiscal. Dr. Rangarajan pointed out that the growth in industrial production was also expected to slide to 7.5 from 8.5 per cent and services to 9.6 from 10.8 per cent in 2007-08.

Even then, the 7.7 per cent economic growth rate would not be “unrespectable and would be [the] second highest growth rate by any country,” PMEAC’s new Chairman Suresh Tendulkar said.

Another council member G.K. Chadha agreed that a GDP growth of 7.7 per cent would, in fact, be “very respectable.”

“One should not forget that there are business cycles and growth cannot move only in one direction,” he said.

Dr. Rangarajan pointed out that the slowdown in economic growth was mainly due to external factors such as rising prices of crude oil and food commodity in the international market coupled with the global slowdown triggered by the U.S. sub-prime mortgage crisis.

Such an adverse global environment, he said, would have implications for the country’s current account deficit by way of an expected sharp rise to 3.2 per cent from 1.5 in 2007-08.

In particular, the soaring inflation rate was mainly on account of surging global commodity prices while there were serious fiscal risks arising from growing off-budget liabilities, estimated at five per cent of the GDP.

“Implementation of the Rural Employment Guarantee Programme and Sixth Pay Commission’s report, we think, will take [the] total deficit to 5 per cent…This is [a] very large fiscal deficit,” Dr. Rangarajan said.

The PMEAC was of the view that while the fiscal deficit targets would not be met, the revenue deficit would continue to persist.

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