Business

Sustaining growth, a ‘critical challenge’

NEW DELHI: The Centre on Friday said the prospects of economic growth remain strong, but cautioned against rising capital inflows. In the Mid-Year Review 2007-08 that was tabled by the Finance Minister P. Chidambaram in Parliament, the Government said “critical challenge” was to sustain the growth momentum and called for paying greater attention to disadvantaged groups so that they could also share economic opportunities.

“Increased capital inflows can impact macroeconomic aggregates through the exchange rates, trade and monetary variable. This was particularly manifest in the first half of the current financial year and thus the management of capital inflows has been and is likely to remain an important issue,” the review said. It pointed out that in an increasingly globalised economic milieu, the strong growth prospects of the Indian economy have been manifest in high corporate profitability, rising investment rates, higher gross domestic product (GDP) growth and rising capital inflows. “However, the economy’s capacity to absorb such capital flows, as indicated by the level of current account deficit, has not risen as fast as the inflows,” it added.

Management of inflows was a complex problem as it was interlinked with monetary management and inflation, trade policy, capital market development and the issues relating to production, investment and growth, it said, and added that “the fiscal cost of sterilisation envisaged at Rs. 3,700 crore in the Budget Estimates of 2007-08 is now being supplemented with Rs. 4,500 crore.”

The Mid-Year Review also stated that reforms measures taken by the Congress-led United Progressive Alliance Government, had improved competitiveness of the Indian economy. “The high growth rate of 9.4 per cent in 2006-07 has been sustained at the level of 9.1 per cent in the first half of the current fiscal. There was a moderation in inflationary pressure and inflationary expectations from the middle of August 2007, with inflation declining to below four per cent after 68 weeks. The moderation in domestic inflation is all the more significant because it happened despite continued firmness in global commodity prices.”

Stating that the “growth has generally been inclusive”, the review said the percentage of persons below poverty line has declined from around 36 per cent of the population in 1993-94 to 28 per cent in 2004-05. “Critical challenges at the current juncture relate to sustaining the growth momentum with macroeconomic stability and improving the competitiveness of industry and service sectors,” it added.

Referring to the agriculture sector, it cautioned that with a four per cent annual growth, the per capita income of people dependant on agriculture would grow by less than the growth in the income of persons engaged in other activities. On employment generation, it said most of the additional job opportunities during the XI Plan were expected to come in trade, transport and construction sectors.

“Given an unchanged labour policy, most of these jobs will be in the informal sector characterised by relatively poor working conditions and lower wages than in the formal sector,” it added.

The Mid-Year Review has called for reviewing the subsidy regime with respect to food, fertilizer and petroleum products and stressed the need for a consensus to be evolved for sector-specific subsidies, while the changes in the delivery mechanism could be made immediately.

Similarly, referring to infrastructure bottlenecks, it pointed out that high cost of power alone was affecting the competitiveness of the domestic industry by 3-5 per cent. The cost would be significant taking into account the high infrastructure costs, delays and other transaction costs, it added.

On the impact of rising rupee on exports, the review said certain sectors like textiles, handicrafts and leather were affected, but exports of gems and jewellery and petroleum products witnessed high growth. Admitting that rupee appreciation could lead to job losses, it said the medium and long-term solutions lie in improving productivity in exports to make them more competitive.

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