The economic advisory council to the prime minister has called a bottom to the economic slowdown even as it outlined a detailed plan for the government to implement, and hinted there was room for the Reserve Bank of India to cut rates.
The council, headed by former central banker C Rangarajan, said the economy could expand 6.4% for the year ending March 31, 2014, on the back of better manufacturing and farm sector growth.
The council’s assessment of the economy is more optimistic than the forecasts by private economists, who estimate that growth will be between 5.8% and 6%. The PMEAC’s sunnier view is predicated on a revival in investments driven by the Cabinet Committee on Investment — a panel of ministers that clears large projects stuck due to uncertainty caused by government policies — as well as the positive sentiment created by recent reforms and fiscal consolidation.
The government’s Economic Survey, released before the budget, had forecast 6.1-6.7% growth in 2013-14. “The very high level of investment rate that we have even now gives us the hope that if we take action for speedy implementation of projects, we can achieve the higher rate of growth quickly even in the short term,” Rangarajan said, releasing the Review of the Economy 2012-13. “I believe we have reached the bottom. The economy will now continue to grow at a faster rate,” he said, pegging farm sector growth at 3.5% if the monsoon is normal. Agricultural output grew 1.8% last year. Private forecasters have said monsoon rains will be normal this year.
The PMEAC expects industrial growth to rebound to 4.9% from 3.1% in 2012-13 while the services sector is projected to grow at 7.7% against 6.6% last year. The CCI has so far cleared a number of projects in the petroleum, gas and coal sectors to speed up investments that grew at a tepid pace of 2.5% last year, as measured by gross fixed capital formation. As per preliminary estimates, the economy expanded 5% in 2012-13, the slowest since 2002-03, but the council feels the number could be revised upwards. The PMEAC had projected a growth rate of 6.7% for the previous fiscal in August 2012. “If the corporate numbers are a better guide of manufacturing, the GDP estimates by CSO (Central Statistical Organisation) for both 2011-12 and 2012-13 could be revised upwards,” it said. Rangarajan said current account deficit was the main concern for policymakers right now, and called for measures to reduce energy imports and greater encouragement to financial savings to discourage purchase of gold. In the short term, the government should encourage capital flows to meet the deficit, said the veteran policymaker. The council expects current account deficit to moderate to 4.7% in the current year from a likely 5.1% last year because of double-digit growth in exports and lower gold imports.
It said wholesale inflation is likely to remain around 6% in the current year because of high food and fuel prices, but felt the recent decline has created room for the RBI to reduce rates.
Wholesale inflation dropped to 5.96% in March, the lowest level since November 2009, raising expectation that the central bank will again cut rates in its May 3 policy review. “I would say the decline in WPI is higher than what was expected. It gives greater space for monetary authority to act,” Rangarajan said, when asked if the RBI should cut rates. The council has listed seven action points for the government, including speedy project clearance, reducing current account deficit, improving net energy availability, containing inflation, reforms in agriculture marketing and supply chain, and making savings products more attractive to curb the fascination for gold.
“We have also indicated that there are several actions which need to be taken to ensure we achieve this higher rate of growth,” Rangarajan said, adding the council had not taken into account political considerations or timing of elections in its assessment.
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