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IEG says 6 p.c. growth unsustainable

By Our Special Correspondent

NEW DELHI OCT. 15. The six per cent GDP growth recorded in the first quarter of the current fiscal may not be sustainable for the rest of the year, according to the Institute of Economic Growth (IEG). It cites demand constraints and the existing drought situation for this gloomy forecasts.

In its monthly survey of the economy, the IEG notes GDP has shown a 6 per cent growth in the first quarter compared to 3.5 per cent over the same period last year. Manufacturing and services have also registered growth of 3.8 and 9.7 per cent respectively. "But this trend may not continue given the demand constraints and the existing drought situation which is expected to reduce the kharif output'', it says. The IEG had earlier predicted that kharif output may fall by 10 per cent this year.

At the same time, the institute warns against any panic reaction to Standard & Poor's downgrading of the country's rating on its rupee debt. It feels this may not have any significant impact because there are many favourable factors such as comfortable foreign exchange reserves and food stocks, low inflation, declining interest rates and reasonably good GDP growth. Policy makers, it says, should neither ignore this warning nor get into any "panic reaction'' by announcing more forex borrowing schemes like the Resurgent India Bonds.

Making forecasts for the coming months in various sectors, the IEG says industrial output is likely to range from 4.5 to 5 per cent over the next three months. It points out that increase in fuel prices, decline in export growth, fall in core sector growth during August and gloomy market sentiments may, to some extent, depress the industry from its currently high growth of 6.4 per cent. But a 4.5 to 5 per cent rise in the industrial sector would not be disappointing as compared to the last fiscal.

Making a special mention of the international oil scenario, it says the U.S.-Iraq tension and the OPEC decision to maintain production limits has led to a spurt in world prices in September to $28.74 per barrel against $27.32 in the previous month. This is expected to put pressure on the government to hike domestic oil prices which may affect the already sagging industrial sector, the institute points out.

On the trade front, the IEG does not expect export growth to exceed 4.6 per cent in the coming months while imports are likely to rise by a marginal 3 per cent. Export growth rate has already declined to 6.5 per cent in August from 17.74 per cent in July. This is attributed to rupee appreciation against the dollar, rise in domestic prices and lacklustre world demand. "However, improvement in domestic industry and expected weakening of rupee may improve out export performance to some extent in the coming months'', the institute says.

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