Date:17/07/2007 URL: http://www.thehindu.com/2007/07/17/stories/2007071760391600.htm

Business

EAC projects 9 p.c. GDP growth

Special Correspondent

Suggests a judicious mix of three instruments

C. Rangarajan

NEW DELHI: The Economic Advisory Council (EAC) to the Prime Minister has projected the Indian economy to grow by a healthy nine per cent in real terms during 2007-08 while advocating a ‘judicious mix’ of three policy ‘instruments or channels’ for tackling the strong capital inflows.

In its report submitted to the Prime Minister Manmohan Singh on July 12, the Council warned that even as the GDP (gross domestic product) growth at nine per cent this fiscal, assuming a “reasonably benign monsoon”, was less than the previous fiscal’s 9.4 per cent, sustaining the lower growth would be difficult in the years ahead if the farm and power sectors continued to lag. For the year, it assessed the inflation level to remain close to four per cent and foreign direct investment (FDI) inflows would swell to $15 billion.

Identifying the current surge in capital inflows as a challenge to liquidity management, the EAC has suggested a judicious mix of three instruments — to let the rupee appreciate up to reasonable limits; absorb the capital flows into reserves and sterilise the excess over what may be regarded as “appropriate”; and liberalise outflows by removing administrative and procedural impediments while discouraging inflows by putting restrictions on some capital items such as external commercial borrowings (ECBs).

Briefing newspersons on the council’s report here on Monday, EAC Chairman, C. Rangarajan, listed two downside risks for the economy, they being the rising prices of crude and power shortages.

Although the EAC did not undertake an analysis of the sectors where foreign capital could be absorbed, Dr. Rangarajan specifically mentioned the real estate sector for being subjected to restrictions. “Real estate is one sector where inflows can be moderated,” he said.

Turning to the issue of growth and employment, Dr. Rangarajan noted that the times of “jobless growth” were over and the economic growth was adding to the number of people finding jobs.

On the state of government finances, the EAC Chairman expressed concern over soaring expenditure leading to high revenue deficit. “The Central Government’s revenue deficit continues to be high and it is unlikely to eliminate it by 2008-09,” he said.

Commenting on the outlook for the current fiscal, the report projected the farm sector to grow by a lower 2.5 per cent against 2.7 per cent, industry output by 10.6 per cent as compared to 10.9 per cent and services by 10.4 per cent, down from 11 per cent.