With the developed world seeing a fragile recovery from the recession, projected to be a modest 1-2 per cent in the second half of 2009-10, a further financial crisis was not completely ruled out, said C Rangarajan, chairman of the Economic Advisory Council (EAC) to the Prime Minister.
Delivering the Burugula Ramakrishna Rao Endowment Lecture on “The current economic scene” here on Thursday, he said the slow recovery of the developed countries had a negative impact on external demand for both manufactured goods and services from India.
“The four per cent cut in the cash reserve ratio (CRR) during the crisis released about Rs 1,60,000 crore in the banking system, and a large part of this remained as excess liquidity and was parked with the Reserve Bank of India (RBI). Deposit re-pricing by commercial banks is likely to see banks push for more lendings and overseas sources of borrowing will improve,” he said.
Deposit-based banking, as practiced in India, was perhaps the more solid foundation to bank lending than the one based on short-term borrowing from capital markets, he said.
Rangarajan said the Indian economy escaped the global contamination primarily because the Indian banking sector was not exposed to toxic assets. “We did not have a recession. There was no decline in productivity. It only slowed down,’’ he said.
He saw the gross domestic product (GDP) to grow around 6.5 per cent this financial year, 7 per cent in the coming financial year, and 8 per cent during the next year. “However, the farm GDP will see a negative 2 per cent growth this year. Manufacturing and service sectors will grow at 8.2 per cent each,” he said.
The farm sector, constrained by low yields in major cereals and pulses, and power, beset with shortages which could lead to production losses and impact competitiveness, are the twin challenges before the country. “Managing inflationary risks, particularly of food items, is the biggest challenge at least up to the next monsoon. The agencies concerned should facilitate import of foodgrain, if required, to cope with the grim situation. However, the 44 million tonne foodgrain, including 15 million tonne rice, in stock is a matter of comfort and strength for the country.”
An over 22 per cent deficiency in the monsoon rain has resulted in the net sown area of all foodgrains declining by 5.5 million hectare, an 8 per cent fall. This will result in kharif rice production declining by 13 million tonnes.
The government, apart from continuing its efforts to protect the ensuing rabi crop, should focus on public distribution system to contain prices. Despite having a large science and technology establishment for agricultural research, the results in terms of productivity left much to be desired, he said.
“There is a need to facilitate private investments in power generation and an active plan, as opposed to an indicative plan, is to be made for creating power capacity over the next 15 years. The country should diversify fuel sources and develop more natural gas and nuclear energy-based power plants,” Rangarajan said.
