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New Delhi, July 23, 2010
The Prime Minister's Economic Advisory Council (PMEAC) today said it expected the Indian economy to grow at 8.5 per cent in 2010-11 and at 9 per cent in 2011-12.
It said the inflation rate was projected to come down to 6.5 per cent by March 2011 due to the expected normal monsoon, combined with the base effect. The provisional headline inflation rate was above 10 per cent in June 2010, it noted.
Releasing the "Economic Outlook 2010-11" here today, Dr C Rangarajan, Chairman of the Council, told journalists that, to sustain a growth rate of 9 per cent, focus was required on containing inflation, improving farm productivity and closing the large physical infrastructure deficit, especially in the power sector.
He said agriculture, which grew at 0.2 per cent in 2009-10, was projected to grow at 4.5 per cent in this fiscal year and 4 per cent in 2011-12.
Industry, which had achieved a growth of 9.3 per cent in 2009-10, is projected to grow at 9.7 per cent in 2010-11 and 10.3 per cent the following year.
The services sector, which recorded a growth of 8.5 per cent last year, is projected to grow at 8.9 per cent in 2010-11 and 9.8 per cent in 2011-12, he said.
The Council pointed to the slow recovery in the global economic and financial situation and said the rising domestic savings and investment were the chief engines of growth in the economy.
Dr Rangarajan said the investment rate was expected to be 37 per cent in 2010-11 and 38.4 per cent in 2011-12. He said the domestic savings rate was expected to be over 34 per cent in 2010-11 and close to 36 per cent in 2011-12.
The Council estimated the current account deficit at 2.7 per cent of Gross Domestic Product (GDP) in 2010-11 and 2.9 per cent of GDP in 2011-12.
It projected merchandise trade deficit to be $ 137.8 billion or 9 per cent of the GDP in 2010-11 and $ 160 billion or 9.3 per cent of GDP in 2011-12.
The Council said invisibles trade surplus was projected to be $ 96 billion or 6.3 per cent of the GDP in 2010-11 and $ 109.7 billion or 6.4 per cent in 2011-12.
Dr Rangarajan said capital flows could be readily absorbed by financing the needs of the high growth of the economy. Against $ 53.6 billion in 2009-10, the capital inflows are projected to be $ 73 billion for 2010-11 and $ 91 billion for 2011-12.
The accretion to reserves was $13.4 billion in 2009-10 and is projected to be $ 30.9 billion in 2010-11 and $ 39.8 billion in 2011-12.
The Council said controlling the high inflation rate was essential for sustainable growth in the medium term. It said the available food stocks must be released to have a dampening effect on prices.
It said the monetary policy would complete the proces of exit and operate with bias towards tightening. It noted that credit offtake had picked up, with a strong growth rate in the first quarter of the current fiscal.
According to the report, the fund flow from the capital market to the commercial sector was quite strong. Bond issuance growth was relatively higher than issuance of equity, it said.
The Council said liquidity conditions were taut enough for monetary policy signals to be appropriately transmitted to the financial sector. A bias toward tightening is necessary, it said. According to it, exchange rate variations will remain within an acceptable range.
Dr Rangarajan stressed that an exit from the expansionary fiscal policy was not only feasible but also necessary.
The Outlook took note of the high buoyancy in direct and indirect tax collections. Telecom auctions and decontrol of the petroleum products prices would provide additional cushion, it said.
The report said the fiscal deficit outturn might be lower than the budgeted consolidated fiscal deficit of 8.4 per cent of GDP for 2010-11. The revenue deficit as a ratio of GDP is expected to decline from 6.3 per cent in 2009-10 to 4.6 per cent in 2010-11.
The Council said operationalization of the Goods and Services Tax (GST) should be a priority.
It said the budgeted levels of Fiscal Deficit and Revenue Deficit were still beyond the comfort zone and stressed the need to rationalise the food and fertiliser subsidies.