The Prime Minister’s Economic Advisory Council (EAC) headed by C. Rangarajan has been cautiously optimistic in its assessment of the economy for the current year. In its report, Economic Outlook 2009-10, released on Wednesday, the Council projects a GDP growth rate of 6.5 per cent, which is higher than all the other official forecasts. The Reserve Bank of India in its July review of the monetary and credit policy had projected a rate of six per cent but with an upward bias. It is noteworthy that since then every GDP forecast has been an improvement over the previous one. The IMF, for instance, is now more upbeat in its assessment of global economic growth than it was a few months ago. Developing countries including India and China are in the forefront of the global recovery. It is more than likely that the RBI will mark up its growth projection in its review scheduled for next week. The EAC’s optimism is based on the fact that an uptrend in the growth momentum is clearly discernible now. The revival in industrial output — the index of industrial production for August was 10.4 higher than what it was in 2008 — is expected to be consolidated further. The EAC expects both the industry and the services sectors to grow by 8.2 per cent. But agriculture will most likely decline by two per cent because of the failure of the monsoons.
A successful rabi crop holds the key not only to higher economic growth but also to containing inflationary expectations. The EAC expects the WPI inflation to go up to six per cent by March-end from its current artificially low levels of just above one per cent. Food inflation poses the biggest challenge to policy makers in the short-term and can only be tackled through a multi-pronged strategy. The rabi crop must be protected right through the season and the public distribution system strengthened. Rice imports, where necessary, will provide a cushion. Global petroleum prices are firming up and the government will be faced with the difficult choice of having to either hike retail prices or bear a higher subsidy burden. Continuing the stimulus packages is both economically justifiable and politically expedient at this juncture but before long a roll back will be in order. High fiscal deficits — expected to touch 6.8 per cent of the GDP this year — while being unavoidable are clearly unsustainable for long. It will be good if the RBI continued with its accommodative monetary policy but the high level of government borrowing is exercising an upward pressure on the interest rates. There are no clear-cut pathways yet for an exit strategy but attainment of higher growth rates will surely open them up.