Given that the Economic Outlook for 2010-11 of the Prime Minister's Economic Advisory Council and the Reserve Bank of India's review of the monetary policy were released within days of each other, it is hardly surprising that many of their observations on the macroeconomy are similar. The Economic Outlook has a wider canvas than the RBI's quarterly review. Both rely on practically the same set of official data sources — such as the CSO's growth estimates — and are equally upbeat in their assessment. Their growth forecasts for the current year are identical — 8.5 per cent. The EAC had projected an 8.2 per cent growth in February, while the RBI had until recently stuck to its conservative estimate of 8 per cent (with an upward bias). Over the recent past, all official forecasters have tended to mark up their figures progressively. Less than a month ago, the International Monetary Fund had forecast a 9.4 per cent growth during 2010. The EAC's expectation of a 9 per cent growth during 2011-12 does not seem unrealistic, given the strong recovery. Its assessment of 8.5 per cent for the current year is predicated on a strong rebound in agriculture, which is estimated to grow by 4.5 per cent with satisfactory crop yields. Industry is expected to grow by 9.6 per cent and services by 8.9 per cent.
The economy may well remain on a high growth trajectory, with a growth of 9 per cent and more looking achievable. However, all the upbeat assessments are subject to important caveats. Inflation, which stood at 10.55 per cent in June — more than twice the comfort level — has been a major worry over the past one year. The RBI's monetary tightening through higher interest rate signals was not unexpected. Inflation has become more generalised and the non-food inflation now accounts for a substantial portion of the WPI inflation. In addition to monetary tightening, the EAC has urged the government to release food stocks to dampen price increases. The problem of low farm productivity needs to be tackled through a package of measures including improved water management and rotation of crops. The infrastructure deficit, another persistent concern, has adversely affected India's competitiveness as well as growth. On a positive note, the EAC expects investments in fixed assets to recover strongly. The savings rate is expected to touch 34.3 per cent this year, going up to 35.5 per cent in 2011-12. Despite a widening current account deficit, the balance of payments is expected to remain comfortable. However, as pointed out by the RBI, capital inflows to bridge the deficit will still remain crucial.