Prime Minister panel forecasts GDP growth at 8.5% in 2011

The prime Minister’s Economic Advisory Council (PMEAC) on Friday forecast an 8.5 per cent growth rate for the Indian economy during the current financial year and sees it accelerating to an even higher nine per cent in 2011-12.

However, PMEAC is of the view that it is essential to curb inflation, raise farm productivity and improve infrastructure, especially power, in order to keep the economy on a nine per cent growth trajectory in the long run.

Releasing the Economic Outlook report for 2010-11, PMEAC chairman C. Rangarajan said the farm sector is likely to grow by 4.5 per cent, industry 9.3 per cent and services by 8.5 per cent.

However, he said inflation at 10.55 per cent is more than double the comfort zone and the Reserve Bank of India (RBI) should take strong monetary action to arrest it. RBI has already raised key interest rates by 0.25 per cent and is going in for a monetary policy review on July 27.

As per the PMEAC report, “ It is hard to visualise strong economic growth in the advanced economies in 2010 and to a large extent in 2011. The implications of this, for India’s strategy to return to the nine per cent growth trajectory, are that public policy must promote business confidence and facilitate increased investment.” The council sees the nine per cent economic growth, coming on the back of high investment and savings rates.

The report expects the domestic savings rate to pick up and reach 34.3 per cent in 2000-11 and 35.5 per cent in 2011-12.

Private corporate investment is expected to recover strongly to fuel growth. Although government expenditure is expected to decline from the peak level in 2009-10 due to withdrawal of the stimulus, the increase in private expenditure is expected to cover this gap and rev up demand for goods and services.

Rangarajan also said inflation would start easing by August-September and cool to seven to eight per cent by December before falling to 6.5 per cent by this fiscal-end due to a higher farm sector output as the monsoon is expected to be normal in the current year.

However, overall low farm productivity could still come in the way of a nine per cent growth projection in the long run, the PMEAC cautioned, while calling for improving water and soil management along with better farm practices and cultivation of a wider range of crops. Dismayed over the shortage in power supply, he pointed out that against a planned target of creating 78,740 mega watts of power, “ it appears we would be lucky to get 62,000 mw by March, 2012”. Pointing out that fuel has become a limitation in the power sector, Rangarajan stressed on broadbasing the fuel usage to nuclear power, natural gas and renewable sources, while reducing the proportion of coal.

The Council expected the manufacturing in particular and industrial sector in general to continue with the high-growth momentum.

“ Overall, we expect manufacturing output to expand by about 10 per cent in 2010-11 and the general index (industrial production) to register almost ten per cent rise,” it said.

The PMEAC also expected services to continue to show buoyancy. Rangarajan said capital flows will be sufficient to cover the current account deficit estimated to be 2.7 per cent of gross domestic product (GDP) this fiscal and add to the forex reserves.

Rangarajan said since the West is showing only a modest recovery, India will be seen as an attractive destination for parking capital.