Taking cognizance of the adverse impact the ongoing slowdown has had on the Indian economy, the Prime Minister’s Economic Advisory Council (PMEAC) on Friday scaled down its GDP (gross domestic product growth) projection for the current fiscal to a more realistic 5.3 per cent from 6.4 per cent estimated earlier.
In its analysis of the causes for the economic downturn — especially when growth projections for the previous two fiscal years stand belied — and the measures that need to be put in place to tide over the current crisis, the PMEAC’s ‘Economic Outlook 2013-14’ unveiled at a press conference here by its Chairman C. Rangarajan, said: “…given these considerations, the Council is looking at a rate of economic growth of 5.3 per cent in 2013-14, lower than that indicated (6.4 per cent) in its April 2013 Review of the Economy”.
The PMEAC expects agriculture and industry to grow by 4.8 per cent and 2.7 per cent, respectively while the growth of the services sector is pegged lower at 6.6 per cent for this fiscal.
Amplifying on the negative factors impacting the economy, Dr. Rangarajan highlighted the twin deficits (fiscal and current account) as the prime challenges and exhorted the need for reduction in oil subsidy to keep public finances under check. Alongside, he listed a slew of measures such as further liberalisation in FDI (foreign direct investment) norms, increased coal output and a stable tax regime which should be put in place to prop up growth in the medium-to-long-term.
While the Economic Outlook pointed to the currency-related disruptions as having impacted the recovery momentum, the PMEAC chief noted that the high current account deficit (CAD) remaines the “main concern at present” even as it is expected to ease to $70 billion or 3.8 per cent of GDP during the current fiscal from a high of 4.8 per cent ($88.2 billion) in 2012-13. Moreover, in the likelihood of a decline in net capital inflows, he said India “will have to draw down its reserves by around $9 billion to bridge the CAD”.
The other major challenge for the government, Dr. Rangarajan said, would be to stick to its resolve of a lower fiscal deficit at 4.8 per cent of GDP this fiscal as it would call for expenditure compression. “Discretionary expenditure budgeted may need to be compressed, and subsidies restructured, in the remaining months of the financial year in a growth-friendly manner to limit fiscal slippages,” he said.
More specifically in this regard, without naming the new programmes, the PMEAC’s Outlook said: “New initiatives in the pipeline that could further add to the subsidy burden should at the very least be put on hold till the state of public finances is brought back to a sustainable level. The large magnitude of subsidies has created serious macro-economic distortions with economy-wide ramifications on investment and growth. It is, therefore, imperative that subsidies are transparent, well targeted and designed for effective implementation and are within prudent fiscal limits”.
Dwelling further on the fiscal deficit front, Dr. Rangarajan pointed out that with the government’s deficit touching 63 per cent in the first four months on this count, there was a need to adjust domestic prices of petroleum products to contain expenditure. “All that required is to have adjustment in the domestic prices (of petroleum products),” he said while suggesting that this could be done by a one-time increase in prices followed by monthly hikes of a lower order later.
As for the rupee which has seen massive depreciation against the U.S. dollar in recent months, Dr. Rangarajan viewed that at the current level, it is “well corrected. Stability is returning to the foreign exchange market. As capital flows return, and as CAD begins to fall, this tendency will strengthen”. Alongside, however, he advocated the need for continuation of the current monetary policy stance until stability in the rupee value is achieved.
As for the growth prospects in 2013-14, the PMEAC hoped that the economy would perform better in the second half of the fiscal year.