FinMin against capital inflow controls; concerned about Europe.
The Union finance ministry on Tuesday signalled that the economy was on track and could grow by as much as 9.1 per cent this financial year, the highest in three years, though rising domestic debt and fiscal deficit remained areas of concern. This is higher than the growth rate of 8.25-8.75 per cent projected by the government in the Economic Survey in February.
In its mid-year analysis of the economy, tabled in Parliament on Tuesday, the finance ministry estimated that growth in 2010-11 would be 8.75 per cent with a variation of 0.35 per cent on either side. It, however, cautioned economic conditions in the Europe posed a downside risk to this growth. The review further said sustaining a high level of growth would require deepening of reform initiatives.
“Now why we have shifted the goalpost… one of the reasons being there have been certain uncertainties, particularly recovery of the euro, and the euro has relevance both from the viewpoint of FDI, investment and also from external trade, particularly export,” Finance Minister Pranab Mukherjee told reporters.
The review pins its hopes on the farm sector, saying production may rise “sharply” this year after the heaviest monsoon rains in three years, helping to boost spending in the countryside, where three-fifths of Indians live, and keeping food prices under control.(Click for table & graph)
“I don’t think the faster growth that we are seeing now than what we had expected is a sign of overheating. We are going back to a growth path that we were already on before the crisis set in,” said Chief Economic Advisor Kaushik Basu.
Among the key macroeconomic challenges facing the economy that the document highlighted is the high level of domestic debt-to-gross domestic product (GDP) ratio. While in the first half of the current fiscal all the targets with regard to non-debt receipts, fiscal deficit and revenue deficit have been met, the analysis states that longer-term fiscal consolidation by Centre and the states should rely more on expenditure reduction.
Basu said this year, the fiscal deficit-to-GDP ratio would come down to 5.5 per cent or even lower, while the revenue deficit was seen at 4 per cent. After seeing a high fiscal deficit of 6.7 per cent last year, the government has projected the fiscal deficit to come down to 4.8 per cent next year and 4.1 per cent in 2012-13.
The analysis views the surge in capital flows as a reflection of the growing strength of the economy and is confident that it has the capacity to absorb these flows. However, it warned against the prospect of rupee appreciation as the only negative consequence of such inflows. However, the finance ministry analysis states that capital controls can hamper growth if not used cautiously with other financial safeguards. The analysis ruled out buying of foreign exchange as a solution because it would lead to inflationary expectations and put pressure on interest rates.
It, however, underlined the need for steps to deal with external capital flows, "which are posing some adjustment challenges" in the economy. The surge in capital flows, it said, had raised the question of domestic absorptive capacity that could lead to "overheating" of the economy. However, with the current account deficit at 2.9 per cent in 2009-10, capital flows at 4.1 per cent of GDP have not been a "matter of concern".
“There are some structural areas where ongoing reform initiatives may need to be deepened and public services improved,” it said, and listed private and foreign investment in infrastructure and core industries, universalisation of elementary education, and issues concerning climate change and use of cleaner technologies as key focus areas.
Basu projected overall inflation for November at 7.5 per cent and said food inflation would go below 8 per cent. He expects the WPI inflation rate to fall to 6 per cent by March.
