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PMEAC cuts GDP estimate to 8.2%

BS Reporter  |  New Delhi 

The prime minister’s economic advisory council (PMEAC) on Monday lowered its economic growth projection for this financial year to 8.2 per cent, from 9 per cent pegged earlier.

C Rangarajan“The projected growth rate of 8.2 per cent, though lower than the previous year (8.5 per cent), must be treated as high and respectable, given the current world situation,” PMEAC chairman C Rangarajan said. According to the council, the global economic and financial condition is unlikely to improve, which will not allow India to sustain the high growth in exports witnessed in the first quarter.

The PMEAC, in its economic outlook for 2011-12, said wholesale price-based inflation would remain high at 9 per cent till October and thereafter, it would ease to 6.5 per cent by the end of March. In June, it was at 9.44 per cent.

Manufacturing will not do well, as was expected earlier. In its February review, the council had pegged manufacturing to grow by 9 per cent, but on Monday’s outlook projected it to grow only by 7 per cent. As if to buttress the council’s assessment, the HSBC Purchasing Managers’ Index, released on Monday, slipped to a 20-month low in July.

Year-on-year rates in % for 2011-12
  Review of the Economy 
(February 2011)
Economic Outlook
(August 2011)
Agriculture 3.0 3.0
Industry 9.2 7.1
Services  10.3 10.0
GDP 9.0 8.2
GDP projection by other agencies (in%)
RBI 8.0 IMF 8.20
Finance Ministry 8.6 ADB 8.20
World Bank 8.0 NCAER 8.30

The industry sector, an overwhelming proportion of which comprises manufacturing, is estimated to grow 7.1 per cent this financial year, against 7.9 per cent in 2010-11. “Domestic industries are uncertain about their investments, because they feel, right or wrong, something is not moving... Surely, foreign investors will be doubly conscious,” PMEAC member Saumitra Chaudhuri said.

Despite almost normal monsoon predicted for this financial year, the agriculture and allied sector growth is pegged at 3 per cent, down from 6.6 per cent recorded in the previous year. The high base effect was expected to pull down growth rates this financial year. Services are projected to grow at 10 per cent, compared to 9.4 per cent projected earlier.

The Reserve Bank of India’s (RBI) decision to raise its repo rate (short-term lending rate) by 50 basis points is also expected by industry to stifle the growth rate. However, Rangarajan said the RBI would have to take such steps so long as inflation remained high.

“It’s certain that the RBI will have to continue to maintain a tight monetary policy stance for quite some time, given the combination of domestic inflationary situation and the international backdrop,” Rangarajan said, quoting the report.

The outlook said while pressure from food inflation had fallen in recent months, the rate of price rice still remained quite high, with the possibility of further surge in the coming months.

Fiscal policy could play a role in containing demand pressures by ensuring the fiscal deficit did not exceed the budgeted (4.6 per cent of gross domestic product, or GDP) level, the PMEAC said, adding this was not going to be easy. In this concern, the council asked the Centre to resolve issues with states and introduce the goods and services tax.

To keep the economy growing at 9 per cent, it said it was important to increase the fixed investment rate.

Besides, India’s growth story is inextricably linked to the power sector. “Immediate policy interventions are required for ensuring coal availability for power plants, land acquisition and environmental clearances and revision of power tariff by states to reduce high AT&C (aggregated transmission and commercial) losses,” the report said.

The council said there was a need to grant the poor a legal entitlement to food, but cautioned availability of grain should be kept in mind while deciding these entitlements.

It also pointed to regional disparity in growth, though lower income states had shown stronger growth rates. The council said to finance the current account deficit, pegged at below 2.5 per cent of GDP for this financial year, foreign investment flows needed to be promoted.

It projected capital flows at $72 billion for 2011-12. FDI inflows are projected at $35 billion in 2011-12, against $23.4 billion last year, whereas FII inflows are projected at $14 billion, less than half of $30.3 billion in 2010-11.

First Published: Tue, August 02 2011. 00:03 IST