India grow at 6.5% in FY10 - Former Reserve Bank of India governor C Rangarajan

The Prime Minister’s Economic Advisory Council, headed by former Reserve Bank of India governor C Rangarajan, said it sees gross domestic product (GDP) expanding by 6.5% in 2009-10 as Asia’s third-largest economy keeps a watchful eye on inflation and the fiscal deficit while it emerges from a slowdown. It is unlikely that growth will be lower than 6.25 %, but may reach 6.75%, the panel said in its Economic Outlook for 2009-10 report to Prime Minister Manmohan Singh.

Highlights of Economic Outlook for 2009-10

• The Indian economy weathered the financial turbulence well6.7 % growth in 2008/09 – amongst the highest growth rates in the world.
• well calibrated adjustments in the monetary and fiscal policies

Projected growth 6.5 % in 2009/10 against 6.7 % in 2008/09

                     Agriculture :  -2.0 % (1.6% in 2008/09)

                     Industry (including construction) : 8.2% (3.9% in 2008/09)

                     Services: 8.2 % each. (9.7% in 2008/09)

Unlikely that growth will be lower than 6.25 % but may reach 6.75 %.

• Impact of international conditionsRecession, higher household savings and demand contraction in developed economies- adverse for exports growth.
• Encouraging signs of revival of capital flows.
• A further negative shock to the global financial system and global inflation could threaten growth in Indian economy.
•  Investment rate unchanged from 2008/09Projected investment rate in 2009/10: 36.5%. Will pick up with improvement in domestic conditions.
• Projected savings rate 34.5% in 2009/10 (33.9% in 2008/09)
• 22.7 % deficiency in the SW monsoon will lower agricultural output     Large acreage losses under kharif foodgrain, mainly rice. Rabi prospects good
• Projected food grain production:223 million tonnes in 2009/10 (234 mt in 2008/09)
• Current Account Deficit : - 2.0 % of GDP in 2009/10 ( - 2.6 % in 2008/09) Exports projected at $188.9 billion in 2009/10
• Imports projected at $306 billion in 2009/10
• Projected merchandise trade deficit for 2009/10:$ 117 billion or 9.4 % of GDP.
• Projected net invisibles: $92.2 billion. Service exports & remittances have revived.
• Capital inflows of $57.3 billion in 2009/10 ($9.1 billion in 2008/09)Net accretion to reserves : $31.6 billion ( - $20.1 billion in 2008/09)
• Surge in food inflation 13% annualized increase in overall WPI index and 33% for primary food index in first half of 2009/10. Sharper rise in CPI indices.
•  Global inflationary pressures will be high – oil and commodity prices rising
•  Inflation in March 2010 expected around 6%
• Improvement in financial conditions – global and domesticRecovery in international loan and equity markets – lower LIBOR/CDS spreads
• Bank credit sluggish till September 2009 but corporate sector raised large amounts from the domestic capital market through debt and equity issuance.
• Calibration of monetary measures will depend on growth and inflationary pressures.
• Serious fiscal strainProjected consolidated fiscal deficit: 10.09% in 2009/10 (8.6% in 2008/09). Higher revenue and primary deficit to persist.
• Debt of centre and states as a ratio of GDP is projected to increase to over 77% in 2009/10
• Need to return to fiscal consolidation
• Some Policy Options – focus on agriculture and power
• Short Term - managing inflation, specially food price inflation   Protect and enhance rabi  crop.
•    Focus on strengthening PDS distribution system
• Medium Term – Farm economy and power  Improve farm productivity – use technology optimally
•   Imperative need to achieve targets and have an active plan over a time horizon of 15 years for capacity creation in electricity
•   Actively explore fuel sources like natural gas and nuclear energy