Indian economy is forecast to grow 5.3 per cent in the current fiscal year ending March 31, 2014, a marginal uptick over the decadal low of 5 per cent growth recorded in the previous year, as per a review of the economy by the economic advisory council of the prime minister.
However, this marks a sharp cut from the council’s previous forecast in April this year which put this year’s growth at 6.4 per cent. Other economists and research houses have pegged India’s growth for the year at around 5 per cent, the same as last year.
The council, which is led by former RBI governor C Rangarajan, said in its report that apart from the substantial improvement in performance of agriculture, the other sectors of the economy will also perform better in the second half of 2013-14 as the full impact of various measures taken over the last six months will be reflected later in this year.
It also pointed out that strong emphasis is being laid on improving the performance of key infrastructure sectors that lie in the public domain such as coal, power, roads and railways. The council further said continuous efforts are being made to remove the bottlenecks in the implementation of projects.
In its economic outlook for the current year, the council projected agriculture growth at 4.8 per cent as against 1.9 per cent last year. This is attributed to early and good monsoon which had a huge positive impact on sowing activity.
“The reservoir position in the week ending August 29, 2013, was 29 per cent better than the average of the last 10 years. Thus both kharif and rabi crops are expected to be good,” as per the report.
The industrial sector is projected to grow at 2.7 per cent as against 2.1 per cent in 2012-13 with manufacturing sector expected to grow 1.5 per cent as compared with 1 per cent last year. However, the services sector growth is expected to be low at 6.6 per cent against 7.1 per cent in 2012-13.
The council projected the investment rate for the year at 34.7 per cent of GDP against an estimated 35 per cent for last year. It also said domestic savings rate will be at 31 per cent of GDP against 30.2 per cent last year.
“During 2013-14 the good performance in agriculture will have a moderating effect on food inflation; depreciation of the rupee may put some upward pressure. On balance, WPI inflation by end March 2014 will be around 5.5 per cent against the average of 7.4 per cent in 2012-13 and 5.7 per cent at end March 2013,” according to the council.
On external sector
The council said controlling current account deficit (CAD) was a core concern with projected CAD at $70 billion (3.8 per cent of GDP) in 2013-14 against an estimated $88.2 billion (4.8 per cent of GDP) in 2012-13. But on a positive note it added that CAD may go even below $70 billion in the current year if the recent trends in exports and imports are maintained through the year.
It forecast merchandise trade deficit at $185 billion (10.1 per cent of GDP) against an estimated $195.7 billion (10.6 per cent of the GDP) in 2012-13. Net invisibles earnings are projected at $115 billion (6.3 per cent of GDP) in 2013-14 against an estimated $107.5 billion (5.8 per cent of GDP) in 2012-13.
The economic outlook said net capital flows are projected at $ 61.4 billion against an estimated $89.4 billion in 2012-13, which was the second highest level to date.
Net FDI inflows in 2013-14 are projected at $21.7 billion against an estimated $19.8 billion in 2012-13. Net FII inflows are projected at $ 2.7 billion in 2013-14, even though data up to end of August show a negative outflow. The commensurate figure is estimated at $ 17 billion in 2011-12 and $27 billion in 2012-13. Total inflows through ECBs and short-term loans are also projected to decline to $22 billion in 2013-14 against an estimated $31.1 billion in 2012-13.
Referring to the pressure on the Indian currency, it said the short-term problem is of financing the large CAD, while the medium term issue is to compress CAD to a more sustainable level of around 2.5 per cent of GDP and ensure price stability.
“The rupee at the current level is well corrected. Stability is returning to the foreign exchange market. As capital flows return and as CAD begins to fall, this tendency will strengthen,” according to the council.
On fiscal situation
The council acknowledged that containing fiscal deficit within the budgeted estimate could be a challenge and said the centre’s budgeted fiscal deficit is estimated at 4.8 per cent of GDP in 2013-14, against an estimated 4.9 per cent in 2012-13.
Pointing out that the fiscal deficit during the first four months of the current financial year has already reached 62.8 per cent, and expenditure on major subsidies 51.3 per cent, of the budgetary provision for the full financial year, it noted, “Discretionary expenditure budgeted may need to be compressed, and subsidies restructured, in the remaining months of the financial year in a growth friendly manner to limit fiscal slippages.”
On monetary policy
The council said the current stance of monetary policy has to continue until stability is achieved in the rupee. “Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authorities can switch to a policy of easing. The time frame for this is very difficult to specify,” it added.
(Edited by Joby Puthuparampil Johnson)