Rise In Industrial Output, Higher Inflation Projected
The prospects of economy for 1997-98 include an improvement in the industrial output and pick-up in export and import growth, but a higher rate of inflation, according to the review of Indian economy (June 1997) by the National Council of Applied Economic Research (NCAER).
The report points out that the prospects for 1997-98 should be viewed in the context of slower growth of industry in 1996-97, especially in the second half, and the policy changes in the 1997-98 budget and credit policy. The trade scenario is expected to improve with a pick-up in global trade.
On the inflation front, another round of increase in fuel prices is on the cards, pushing the rate above the current 6-7 per cent (based on the wholesale price index). However, the review says an oil price hike is necessary to maintain the financial stability of this key sector until a more flexible pricing system is in place.
The review points out that the Union budget and the credit policy have created an economic policy mix conducive to increased investment.
The industrial performance during the second half of 1996-97 has been worse than in the first half.
However, the budget has provided significant incentives for savings and investments. The monetary and credit policies for the first half of 1997-98 have addressed two major issues which had a negative impact upon industrial growth in 1996-97. These relate to the slow growth in non-food bank credit and the persistence of high lending rates, despite comfortable liquidity in the banking system in 1996-97.
The review says the world gross domestic product is expected to ac- celerate during 1997 and 1998, as is world trade. The resultant incre- ased demand for Indias exports is expected to translate into higher domestic production. This, along with expected higher domestic demand for investment goods, is likely to be an additional factor to pull the economy out of the slow-down phase of 1996-97. The report says the dip in export earnings we- re partly due to the appreciation of the dollar against major currencies.
Once the exchange rate realignment is completed for the major currencies, the depressing effect of dollar appreciation vis-