Economy cruising towards 8% growth

PM's advisory council warns on hardening interest rates.

The Prime Minister's Economic Advisory Council has forecast that the economy will grow at 7.9 per cent in 2006-07, which is slightly lower than the average growth of 8.1 per cent recorded in the past three years.

However, the council said some hardening of interest rates was necessary to check inflation, which might be contained at 5.5 per cent by the year-end (as compared to 4.1 per cent at the end of the previous financial year).

Interestingly, the council stressed the need for fiscal discipline, as mandated by the FRBM Act. This is in contrast to the Planning Commission proposing a pause to the Act, and pushing for higher spending.

In its economic outlook for the current financial year, the council, chaired by C Rangarajan, said the growth momentum could be accelerated if the government responded with a strong and credible policy to create a conducive climate for investment.

To this end, it urged the government to provide better infrastructure, and make sure capital investment needs were made available at reasonable rates of interest.

"A critical requirement for this to happen is the government reducing the fiscal deficit, particularly the revenue deficit," it added.

Stating that growth in the recent past had been driven more by consumption than investment, the council felt that tightening the credit market would restrain consumption demand to some extent.

"However, this need not necessarily result in a growth downturn," it said, and added that there were no significant external constraints in the way of economic expansion.

The council said the 7.8-8 per cent growth would come on the back of industry growing at 9.7 per cent, services at 9.5 per cent, and agriculture at 1.5 per cent.

However, it said that if agricultural growth declined to 1 per cent on account of weather vagaries, the overall growth rate would drop to 7.9 per cent. On the other hand, the overall growth could rise to 8 per cent in the event of a very good monsoon and agricultural growth of 2 per cent.

In view of the increase in prices across several sectors, containing money supply growth had to be an integral part of inflation management, it said.