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NCAER maintains real GDP at 7.2%, despite mixed signals

Our Bureau

NEW DELHI, Aug. 10

BOLSTERED by the satisfactory progress of the monsoon, the National Council of Applied Economic Research (NCAER) maintains its earlier forecast of 7.2 per cent growth in real GDP for the current fiscal, even as mixed signals emanate from industry, trade and financial sectors as the economy is in the midst of the crucial second quarter.

In its latest Review of the Economy, the Council's Macro-Monitoring & Forecasting Division said that ``with a more satisfactory monsoon being the likely scenario for the year and a good export scenario on the cards, a pick-up in investment activity can s ustain industrial output'', it said adding that the corporate sector is witnessing a phase of consolidation and re- structuring. But the evidence of new investments is lacking save in the new economy segments.

The Council noted that one major factor influencing investment expenditure appears to be the volatility in capital markets both in India and elsewhere and mixed signals on the pace of economic reforms. It further noted that the high levels of global pric es of petroleum crude continue to be a concern both due to its impact on the import bill and on the oilpool deficit, which then impacts on the health of the domestic oil sector if the administered prices are not adjusted corresponding to the rise in inte rnational price.

Presenting a simulation of a few alternative scenarios pertaining to oil prices from the NCAER short-term macroeconomic model, it said the results show that to balance a five per cent increase in international crude price, domestic petroleum product pric es would have to increase by an average of 3.5 per cent in order to keep the oil pool account at the same level as before the hike in international prices. This, however, does not imply that Government deficit would also remain unaffected, it said.

As the results show, fiscal deficit is higher due to the fact that, nominal expenditures of the Government are also higher. The current account deficit increases by 1.5 per cent over the pre-hike scenario of both the international and domestic petroleum prices. Thus, the Council said, the rise in global crude prices have not only an impact on oilpool account but attempting to balance it were inadequate to keep the fiscal gap unaffected unless there are also other expenditure controls.

On industry, it said, growth momentum appears to have slackened significantly during the first two months of the current fiscal. The lower growth in the general index is mainly on account of poor performance of the manufacturing sector which grew at a lo wer rate of 5.89 per cent as compared to the growth of 8.64 per cent in April-May 1999.

Pointing out that improvements in foreign direct investment (FDI) and external commercial borrowings (ECB) inflows, with their direct impact on investment and access to funds in the domestic markets, would be essential for growth of both the industry and the services sector, the Council said that despite pro-investor policy to attract FDI, these efforts are disappointing relative to expectations. The inflow of FDI in 1999-00 amounted to $2.2 billions which is not merely way below the $10-billion target, but lower than the peak of 1997-98.

The Council said FDI inflows in the wake of liberalisation are directed at enhancing foreign equity in companies registered in India or into acquisition of Indian companies occupying a prominent place in the Indian market. This is borne out by the fact t hat in 1999 the share of exports and imports to net sales in foreign-owned companies was 27.1 per cent, less than the Indian owned companies. As a result in such cases FDI inflows have not been accompanied by any substantial increase in exports. The bene fits of FDI in terms of new technology and access to foreign markets to the Indian economy have not been fully realised, it said.

On prices, the Council noted that in the first quarter of the current fiscal, the average inflation (based on WPI) was 6.4 per cent as compared to 3.3 per cent in the same quarter last year. The rise in the prices of the fuel group continues to be promin ent. The increase in this sector was 26.8 per cent as against 2.6 per cent in the same quarter last year. This sector contributed 62.6 per cent in the overall inflation in the first quarter of the current fiscal.