Prime Minister’s Economic Advisory Council (EAC) today cut its growth forecast to 7.1 per cent for the current fiscal, lower than the previous projection of 7.7 per cent, due to painful adjustments to global economic turmoil. Indian economy had grown by 9 per cent in 2007-08.
It has projected a growth rate of 7-7.5 per cent or more in 2009-10 due to a positive spin-off effect of the fiscal stimulus packages, monetary easing and increased public expenditure and a likely rebound in global economy in the June-September quarter, the panel said in its second review of the economy.
The sharp fall in prices of crude and other commodities will have a positive bearing on inflation, which is likely to close to 4 per cent by March this year, lower than earlier estimate of around 8 per cent.
The combined fiscal deficit of both the Centre and the states will be at undesirable level of around 10 per cent, but a compelling need in the exceptional circumstances of the current year, the panel said. It is not feasible to stick to the Fiscal Responsibility and Budget Management (FRBM) prudential norms at this juncture as it may result in steeper slowdown in economy, said Suresh Tendulkar, chairman of the panel.
The fiscal deficit has widened because of supplementary demand for grants, stimulus packages and additional borrowing permission to the states. However, falling commodity prices will have a positive impact next year due to lower government burden towards oil subsidy and fertilizer subsidy, said Govinda Rao, a member of the PM panel.
“There is an equally urgent need to bring government finances back on the track of fiscal consolidation once there is an improvement in economic conditions,” said Tendulkar, cautioning that higher fiscal deficit may create a crisis in the medium term.
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The panel has lowered its investment rate by 2.5 per cent to 35 per cent in 2008-09 over the previous year on account of financing constraints faced by firms and lower investor confidence in 2008-09. Savings rate is also likely to be lower due to larger negative savings of government and corporations. External payments situation is expected to be reasonably comfortable and current account deficit is estimated to be at 1.9 per cent of the GDP in 2008-09.
“Indian economy likely to remain relatively weak in the first quarter of the fiscal 2009-10 and will slowly pick up thereafter. It is expected to show a fairly strong recovery in the second half of the fiscal,” said Tendulkar.
Among other factors, the forecast has taken into account favourable factors like an agrarian economy not in crisis, resilience of the Indian enterprises post 1991 competitive environment, healthy bank balance sheets, string domestic demand and savings, the panel noted.
Agriculture is expected to grow at 3 per cent as against the earlier projection of 2 per cent in 2008-09.