New Delhi: The Prime Minister's Economic Advisory Council (PMEAC) on Monday lowered the economic growth projection for the current fiscal to 8.2 per cent from 9 per cent earlier, citing the uncertain global outlook, high domestic inflation and subdued industrial performance.
The PMEAC, in its Economic Outlook for 2011-12, also said inflation will remain around 9 per cent till October and thereafter, it would ease to 6.5 per cent by the end of March, 2012, indicating that the RBI may continue with its tight monetary policy for some more months to come.
"The projected growth rate of 8.2 per cent, though lower than the previous year, must be treated as high and respectable, given the current world situation," PMEAC Chairman C Rangarajan told reporters in New Delhi.
Rangarajan, who had earlier presented the report to Prime Minister Manmohan Singh, said India's agriculture output is projected to grow at 3 per cent in 2011-12, with a favourable monsoon on the cards, as against 6.6 per cent witnessed in the previous fiscal.
Underlining the weak performance by industry, he said the sector is likely to grow by 7.1 per cent in 2011-12, as against 7.9 per cent in 2010-11, due to a slowdown in investment and the weak business sentiment.
"Domestic industries are uncertain about their investments, because they feel, right or wrong, something is not moving... Surely foreign investors will be doubly
conscious," PMEAC member Saumitra Chaudhuri said.
The services sector, which accounts for over 50 per cent of the GDP, has, however, been projected to grow at 10 per cent this fiscal, compared to 9.4 per cent in the previous fiscal.
Explaining the reasons for the downward revision of the growth forecast, Rangarajan said, "We have looked at what is happening in the US and Europe, which have an impact on Indian economy... International situation has not improved since February, 2011. It has rather deteriorated... the current international environment is not conducive for rapid growth."
In February this year, the PMEAC had projected that the Indian economy would grow at 9 per cent this fiscal. Rangarajan said: "To keep the economy growing at 9 per cent, it is important to increase the fixed investment rate."
The economy was growing at over 9 per cent before the global economic crisis pulled down the rate to 6.8 per cent in 2008-09. After recovering from the slowdown, it recorded a growth rate of 8.5 per cent in the 2010-11 fiscal.
The PMEAC's projection for 2011-12 is higher than the 8 per cent growth forecast made by the Reserve Bank in its annual monetary policy, but it is lower than the government's target of 8.5 per cent.
Giving priority to controlling inflation, the PMEAC said, "The RBI will have to continue to follow a tight monetary policy till inflation shows definite signs of decline."
The RBI has already hiked benchmark rates 11 times since March, 2010, as part of its efforts to tame inflation.
To contain inflation, Rangarajan said there is a need for policy intervention at different levels.
"We should use foodgrains in the public distribution system (PDS) to moderate food prices," he said. It is also important for fiscal policy to contain demand
pressure and ensure that the fiscal deficit does not exceed the budgeted level, he added.
For 2011-12, the PMEAC forecast a fiscal deficit of 4.7 per cent, which is inclusive of a 0.1 per cent off-Budget liability, for the Centre, and 2.1 per cent for states.
"Revenue may be equal to the budgeted level, but expenditure need to be checked," Rangarajan said. Stating that materialisation of Goods and Services Tax (GST) and the Direct Taxes Code (DTC) would play a key role in the medium-term, he said the government needs to increase efforts for revenue collection and reduce tax arrears.
The PMEAC report also said that capital flows this fiscal were likely to rise to $ 72 billion from $ 61.9 billion in 2010-11.
Foreign direct investment (FDI) inflows, according to the advisory panel, might touch $ 35 billion this fiscal, up from $ 23.4 billion in 2010-11. However, the FIIs are likely to infuse just $ 14 billion in FY'12, less than half of the $ 30.3 billion they pumped into the country in the previous fiscal.
Commenting on the current account deficit (CAD), Rangarajan said: "Given our growth needs, a moderate trade deficit and CAD are inevitable. To finance the CAD, foreign investment flows need to be promoted. However, CAD (should be) contained below 2.5 per cent of GDP."
Referring to the proposed Food Security Bill, he said availability of foodgrains should be considered while promising legal entitlements.
Efforts, he added, should be made to reform the PDS, as well as introduce smart cards and unique identification numbers to ensure that the intended benefits reach the poor and needy.
Among the key concerns for the economy, the PMEAC said there was a need to bridge the growth disparity between states and take policy initiatives on contentious issues concerning the power sector, land acquisition and environmental clearances for industrial projects.
The states, Rangarajan said, also need to revise power tariffs, reduce Aggregate Technical and Commercial losses and focus on non-conventional energy.
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