Even as global recovery continues to be slow and fragile, the Prime Minister's Economic Advisory Council (PMEAC) on Monday projected the Indian economy to grow by 8.6 per cent this fiscal and inch closer to the pre-crisis level with a bounce-back to 9 per cent in 2011-12 owing to strong performance by the industry and service sectors.
Higher farm output
Holding out the council's rosy projections, PMEAC Chairman C. Rangarajan alongside made out a strong case for further withdrawal of the stimulus that was extended to industry to combat the global financial crisis, and the urgent need for fiscal consolidation and implementation of the Goods and Services Tax while warning that inflation still continued to be at uncomfortably high levels.
According to the council's ‘Review of the economy 2010-11', released by Dr. Rangarajan at a press conference here, while the 8.6 per cent GDP (gross domestic product) growth during the current fiscal would be sustained by higher farm sector growth and thereby make up for the lag in other sectors, the rebound next fiscal would come about with a slight refashioning of the GDP components.
“The council continues to be of the view that it is possible to achieve growth of 9 per cent in 2011-12, while slightly refashioning the GDP components. The farm sector is... expected to grow [during 2011-12] by 3 per cent (against 5.4 per cent in 2010-11), the industrial sector by 9.2 per cent (8.1 per cent) and the services sector by 10.3 per cent (9.6 per cent),” the review said.
The economy had posted robust growth rates of 9.5 per cent in 2005-06, 9.6 per cent in 2006-07 and 9.3 per cent in 2007-08 but the impact of the global meltdown pulled down the growth rate to 6.8 per cent during 2008-09. To combat the situation, the government provided stimulus to the industry and the economy picked up again to post a higher growth of 8 per cent in 2009-10.
A week ahead of the budget for 2011-12, the PMEAC has now pitched for withdrawing some of these incentives that had been provided by way of stimulus. “We have to get back to the fiscal consolidation ... this means withdrawal of some of the stimulus,” Dr. Rangarajan said while noting that the withdrawal should be in stages. “I believe it is the time to move towards the process of fiscal consolidation. We clearly need to move in that direction,” he stressed.
In its review, the PMEAC pointed out that a major portion of fiscal adjustment would have to come from additional tax revenues and called for “continued attempts to reform tax administration, review the double taxation avoidance agreements and other measures to prevent flight of incomes to tax havens.”
According to the PMEAC, the Centre's fiscal deficit this fiscal is likely to be lower at 5.2 per cent of the GDP as against 5.5 per cent estimated earlier. However, the council feels that adhering to targets in later years may be a problem.
As per the Finance Commission's recommendations, the government will have to bring down the fiscal deficit to three per cent of the GDP by 2014-15. “While the current year's fiscal adjustment may not be a problem, the government faces formidable challenge of conforming to the Finance Commission's targets in the medium term,” the review said.
As for inflation which remains at ‘uncomfortably high' levels, the PMEAC stressed the need for concerted steps by the government and the Reserve Bank of India to rein in the price spiral.
“Inflation now stands at uncomfortably high level. Monetary and fiscal policies have to be appropriately tight to protect the economy from inflation,'' Dr. Rangarajan said.
