The Prime Minister’s Economic Advisory Council (PMEAC) on Wednesday maintained that having “weathered the financial turbulence well”, the Indian economy could grow by 6.75 per cent this fiscal despite the bad monsoon affecting farm production but cautioned that “in the short-term, managing inflationary risks, particularly food price inflation, is the biggest challenge to policy makers.”

In its ‘Economic Outlook for 2009-10’ submitted to Prime Minister Manmohan Singh, the PMEAC noted that the industrial sector was likely to show “vigorous growth” in the second half of the year while farm sector growth was likely to be negative. “Given the variability of the key elements, the Indian economy is likely to grow by about 6.5 per cent in 2009-10. It is unlikely that growth will be lower than 6.25 per cent but possible that it could reach 6.75 per cent,” it said.

Releasing the document to the media at a conference here, PMEAC Chairman C. Rangarajan said the ongoing global financial crisis and the impact of drought on agriculture -- projected to post a negative growth of two per cent, were the key factors impeding the country’s GDP (gross domestic product). Despite the setback, the country’s economy was much better poised when compared to some of the other countries. “On the whole, we must say the Indian economy has weathered the international financial crisis very well. It has been able to hold on to a rate of growth of economy which is perhaps the second fastest in the world,” he said.

The most worrying factor, Dr. Rangarajan said, was the inflationary pressure which is hovering around one per cent at present but may firm up to six per cent by the end of the financial year. He, however, pointed out that despite the expected spurt in inflation led by rising food prices in the coming months, the soft monetary policy stance may have to continue till the end of March 2010 to lend support to the economic recovery. “The monetary policy has been accommodative in the past several months... the stance will have to change, but will have to wait depending on the growth performance and inflationary pressures on the economy,” he said.

While rising inflation remains a “disturbing element in the Indian economy”, foodgrain production has been estimated at 223 million tonnes or, in effect, leading to a shortfall of 11 million tonnes as compared to the previous year. Coupled with this is the still uncertain global outlook. “The principal risk that emanates from the global economy for India is inflation contagion, with crude oil prices once again in the lead. The other risk is the possibility of another setback to the world of finance, where even a small failure has an amplified capacity for destabilisation,” the PMEAC said.

High fiscal deficit

Turning to the aspect of high fiscal deficit -- projected at 6.8 per cent of the GDP for the Centre and at 10.09 per cent including that of States, Dr. Rangarajan stressed that the current level was not sustainable over a long period and must be brought down. “In 2010-11, some effort will be made to bring it [fiscal deficit] down in a measured way and the process of fiscal consolidation will have to start from next year,” he said.

The PMEAC has projected that while the country’s exports could touch $188.9 billion with imports at $306 billion this fiscal, capital inflows could be about $57.3 billion with net addition to foreign exchange reserves projected at $31.6 billion. Alongside, it has projected the country’s investment rate in 2009-10 unchanged at last year’s 36.5 per cent even as the savings rate was likely to inch up marginally to 34.5 per cent of the GDP from 33.9 per cent during 2008-09.

As for the immediate priority and options for policy makers, the PMEAC has emphasised the need for managing inflation, especially food prices.

Dr. Rangarajan said. For the medium term, the focus should be on improving farm productivity and alongside actively explore fuel sources such as natural gas and nuclear energy.

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