Rs 40 A $ May Lead To 5.75% Gdp Growth: Study

Indias gross domestic product is expected to grow by around 5.75 per cent in 1998-99, a study by the Delhi-based Institute of Economic Growth (IEG) projects, if no new policy initiatives on the fiscal side are taken, there is a slight further easing of monetary policy and the average exchange rate is Rs 40 to the dollar.

The study is the first of the series of Economic Outlook for India from IEGs development planning centre, which it now intends to regularise. On similar lines, a mid-year appraisal of the economy will be brought out under the title mid-year review.

Due to the expected recovery of world prices and the depreciation of the rupee that has already occured, exports are expected to recover partially in 1998-99 despite the events in east Asia.

The study points out that a further depreciation to Rs 45 to a dollar would act as a stimulus to growth but at the expense of a some what higher inflation rate.

It is argued that the precarious fiscal position prelcudes any significant pump priming. But that there is an urgent need for public investment in infrastructure, which can only be financed through through widening the tax net.

This will, however, have an impact only in the medium term. In the short term, an acceleration in growth will have to depend on both export performance and an expansionary monetary policy. Further, the two are linked since an easier monetary policy is likely to lead to depreciation of the rupee which should encourage exports.

No strong recovery can, however, be expected in 1998-99. Only in the agricultural sector, a recovery may be expected.

Assuming a normal monsoon, the growth rate will accelerate to its trend rate. But its impact on the overall GDP will not be more than .75 per cent, the IEG study observed.

However, the study says that the non-agricultural sector may further slow down as is indicated by the figures over the last month of 1997 and January this year on industrial production and exports.

With a slightly larger trade deficit expected in 1998-99 and a fall in the invisibles surplus (due to the deteriorating economic climate in the Middle-East and south-east Asia), the current account deficit is expected to increase from 1 per cent of the GDP in 1996-97 to nearly 1.75 per cent in the fiscal year 1997-98. This is expected to fall to 1.5 per cent of the GDP in 1998-99, when the trade deficit improves.