The Hindu Business Line : GDP may rise to 7.1 per cent this fiscal, says NCAER

THE National Council of Applied Economic Research (NCAER) on Thursday revised its recent GDP projection for the current fiscal from 6.7 per cent to 7.1 per cent now "as the year has begun on a strong platform for growth" though it tinged the optimism with some riders such as "if the rate of growth of private investment increases in nominal terms and some of the critical issues confronting the economy get adequate attention".

In its quarterly review of the economy, the Council noted that if the rate of growth of private investment increases from 11.8 per cent to 14.5 per cent in nominal terms, GDP growth could reach 7.1 per cent in 2004-05.

Elaborating the areas of concern characterising the economy at this juncture, the Council said the state of fiscal health, both at the Centre and State levels, is no better than what it was in 1991. The combined fiscal deficit of the Central and State governments is hovering around 10 per cent of GDP, it said adding that one of the major reasons for the deteriorating fiscal health since the middle of the 1990s has been the slowdown of industrial growth and implementation of the Fifth Pay Commission package.

It said the recent announcement of merging 50 per cent of the dearness allowance of Central Government employees with the basic pay is likely to increase the wage bill by nearly 11 per cent and States would follow suit. "The merger of DA is likely to impact fiscal health in a manner similar to the one experienced after the implementation of the Fifth Pay Commission package, if it is not supplemented by increases in revenue," the Council warned.

Though the Fiscal Responsibility and Budget Management Bill (FRBM) passed by Parliament in 2003 aimed at eliminating the revenue deficit by 2008, the Council said that much would depend on the progress made on several fronts including implementation of Value-Added Tax (VAT), expansion of the tax net, reduction in policy uncertainties and fostering a policy milieu conducive to investment and growth, reduction in subsidies and aligning the interest rates on provident funds with the interest rates on bank deposits.

"Otherwise the Government will have to bail out provident funds as it did for the UTI and IDBI", the Council stated.

Pointing out that in the past abrupt cuts in customs duties on capital goods have given "discouraging signals" to potential investors, it said among others this perhaps is also one of the factors that has inhibited new investments in the economy. Thus the Government would have to spell out a roadmap for the same, rather than tinkering with them in a piecemeal manner, it said.

While significant progress has been made in road and telecom infrastructure, infrastructure in rail, ports, civil aviation, and electricity is still not up to the mark.

Delays in improving port infrastructure and electricity shortfall continue to be an obstruction to comparative advantage for globally competing Indian manufacturing firms, the Council contends.

It further said a view had to be taken with regard to interest rates. Though the RBI has made efforts to bring the official rate down to 6 per cent this is still high in comparison with international rates.

The efficiency of the banking sector, as reflected by the wedge between lending rates and the deposit rates, is very poor and it must be looked into seriously, the Council said adding that the banking sector reforms directed at privatisation and or bringing in more competition among public sector banks assume significance.

Since rural credit is often construed as a liability than an opportunity, the penetration of commercial banks in rural areas would continue to be thin, calling for the Nabard to play "a much more active and critical role in developing specialised banking for micro and rural financing", the Council noted.

Finally, it said another cause for worry is employment. According to the National Sample Survey Organisation (NSSO) data, employment growth declined from 2.7 per cent during 1983-94 to 1.07 per cent during 1994-2000. Employment in the organised sector increased marginally from 26.7 million in 1991 to 27.8 million in 2001, indicating an average annual employment growth of 0.42 per cent between 1991 and 2001.