The government is unlikely to reverse its expansionary policy, aimed at spurring investments and growth, in the current financial year ending March, Planning Commission’s report on its economic outlook said today.
“In fact, concern is beginning to be expressed internationally on the need for an ‘exit strategy’, though an immediate reversal of the counter-cyclical stance is not likely in the current year,” the report said.
The Indian economy is likely to expand at 6.3 per cent in the current fiscal, and the momentum is set to pick up in 2010-11 to an 8 per cent growth, it said.
India’s gross domestic product growth had fallen to 6.7 per cent in 2008-09 from an average 9.4 per cent in three years to 2007-08 due to the impact of global financial crisis and slowdown in domestic demand.
The government and the Reserve Bank of India took a series of fiscal, administrative and monetary easing measures to push growth ever since the global slowdown deepened from mid-September last year.
While government announced tax cuts and increased spending, the RBI took steps to ease liquidity by making major rate cuts.
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The Planning Commission acknowledged the effect of weak monsoon rains on economic growth.
“In the absence of drought, India’s growth rate would have recovered to around 7 per cent in 2009-10, but weak southwest monsoon is likely to push it down to 6.3 per cent.”
As on August 26, monsoon rains were 25 per cent below normal in the country, and the government has declared 252 of the total 626 districts drought-hit.
Additional spending to combat the drought situation is also likely to put pressure on government’s burgeoning fiscal deficit, the report said.
“The drought in the current year will also consume fiscal resources in an unanticipated fashion... There is an overwhelming need to reduce some untargeted subsidies on economic grounds, which are known to generate large leakages such as on account of under-pricing of kerosene and liquefied petroleum gas,” it said.
The budget for 2009-10 has estimated government’s fiscal deficit at 6.8 per cent of GDP, from 6.2 per cent last year.
The report, however, sees the fiscal consolidation process resuming next year, as the global economy is likely to recover and as inflation concerns emerge again.
The inflation rate based on the Wholesale Price Index is seen around 4.0-5.0 per cent by March-end, it said.
In its annual report for the year ended June 30 released last week, the RBI highlighted inflation concerns with weak monsoon posing upside risks.
“Maintaining stable macroeconomic conditions with a credible time path of fiscal consolidation from 2010-11 onwards is essential both to keep possible price pressures under check and to provide room for much needed expansion in private investment in the last two years of the Plan.”
Farm, industry
The Planning Commission report sees 2009-10 farm sector growth at (-) 2.5 per cent from 1.6 per cent a year ago.
“There is no doubt there has been much damage to sowing and prospective kharif output appears to be significant,” it said.
Kharif crop output is seen down 14 per cent year on year, the report said, while the overall food grain production is seen at 218 million tonne, down 6.8 per cent.
“The decline in food grain production will put some pressure on open market food prices in 2009-10. However, large food stocks should help alleviate the scarcity.”
“The decline in overall acreage under principal crops and hence, the output can be mitigated for the year as a whole. This will be particularly true if rainfall in late August and September is reasonable,” it said.
The report sees industry and services sector showing strong recovery in the second half of the current fiscal, with overall growth expected at 7.8 per cent and 8.2 per cent, respectively.
“There are indications of an upturn in manufacturing and also in electric power generation and mining,” it said.
The report sees infrastructure investment falling below the 11th Plan target, and aims at investment close to 40 per cent of GDP in the medium-term.