High growth momentum will not be sustainable unless policy initiatives are in place

The Prime Minister's Economic Advisory Council (PMEAC) on Friday projected an economic expansion of 8.5 per cent for the current fiscal backed by a ‘substantial jump' in farm sector growth on the assumption of a normal monsoon and higher at 9 per cent in 2011-12 while cautioning that the high growth momentum would not be sustainable unless short and medium-term policy initiatives are in place to tackle high inflation, low productivity in agriculture and the deficit in physical infrastructure.

Releasing the Council's ‘Economic Outlook for 2010-11' to the media here, which was submitted to the Prime Minister on Thursday, PMEAC Chairman C. Rangarajan noted that inflation, which has remained a major source of concern in the economy for more than a year, needed to be tackled as a priority in the short-term.

Dr. Rangarajan stressed that with the WPI-based headline inflation at 10.55 per cent in June on account of high prices of food items and fuel — a level which was more than twice the comfort level for the people — the Reserve Bank should take some strong monetary measures or at least some ‘baby steps' to contain the price spiral as the inflationary pressures were now evident in the non-food manufacturing sector. “A bias towards [monetary] tightening is necessary,” he said.

The PMEAC chief, however, acknowledged that food inflation had started softening and the overall inflation would also start easing by August-September and soften further to about 7-8 per cent by December and eventually decline to 6.5 per cent by the end of March next year on account of higher farm output.

Farm output

The farm sector, he said, was expected to grow by 4.5 per cent, industry by 9.3 per cent and services by 8.5 per cent this fiscal and all these segments would account for the higher growth at 8.5 per cent as compared to the earlier projection of 8.2 per cent growth.

Following to years of poor monsoon rainfall, which resulted in a farm growth of 0.2 per cent in 2009-10 and 1.6 per cent in the year earlier, a normal monsoon would boost agriculture prospects and lead to 4.5 per cent expansion, albeit aided by a low base.

Turning to the area of economic policy, Dr. Rangarajan said there were clearly three issues that were, and would continue to remain, of primary importance in ensuring sustainable economic growth at rates of 9 per cent or higher.

“The first is containing inflation, the second is ensuring steady improvement in farm productivity and incomes, and the third is closing the large physical infrastructure deficit, especially in the power sector,” he said, quoting the report.

In particular, the overall low farm productivity would stand in the way of 9 per cent growth projections in the long run and this called for improving water and soil management along with better farm practices and cultivation of a wider range of crops. “We need to develop an integrated approach to these issues,” he said.

Infrastructure deficit

The third area in which medium-term policy initiatives were necessary so as to maintain the growth momentum was the large gaps in physical infrastructure. “In the power sector, as against a planned target for creating 78,740 MW, it appears we would be lucky to get 62,000 MW by March 2012. This rests on large capacities being commissioned in 2010-11 and 2011-12. The failure to create physical infrastructure in time has not only been persistent, but has also been a significant contributor to lower competitiveness,” the PMEAC said

On the positive side, the Council viewed that nine per cent growth next fiscal would be possible on the back of high investment and savings rates of 38.4 per cent and 36 per cent during the year. Alongside, assuming slow recovery in the West, Dr. Rangarajan felt that capital inflows would be sufficient to cover the current account deficit estimated at 2.7 per cent of GDP this fiscal — which is expected to be revised downwards —- and add to the forex reserves.

Although portfolio investment is likely to decline to $ 25 billion this fiscal from $ 32 billion in 2009-10, robust FDI inflow would more than make up for the decline.

Also, with western world showing only a modest economic recovery, India would be seen as an attractive destination for parking capital, he said.

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