The Hindu Business Line : NCAER lowers GDP forecast marginally

THE National Council of Applied Economic Research (Ncaer) has marginally revised downward its forecast of the growth rate for the economy during the current fiscal from its earlier 7.2 per cent in April to 7.1 per cent now, taking due cognisance of the current domestic and global developments.In its quarterly review, released here on Wednesday, the independent think tank on policy issues contends that the major driver behind this marginal revision is the combination of four factors, viz., the monsoon, the rising oil pries, a dampening of the world economy and the domestic investment climate.

Elaborating the key assumptions, which are different now compared to the April forecast, the Council said agricultural production is now set to rise by 2.5 per cent against 3.5 per cent assumed in April and agricultural prices to rise by 6 per cent (5.5 per cent). World GDP growth of is now 3.1 per cent as against 4.3 per cent assumed earlier.The Council said the decline in agricultural production causes demand to contract, resulting in a deceleration in GDP growth. Though there has been a revival of the monsoon, there have also been delays and erratic rainfall. "Flooding in different parts of the country has caused difficulties in transportation, leading to a shortfall of supplies in different mandies and causing inflationary tendencies in agro-products," the Council said.

Simultaneously, the rise in agricultural and oil prices generate a supply side push for industry to increase production. Industry experiences a growth of 7.5 per cent in this forecast, which is only marginally lower than the earlier forecast. There has also been no adverse impact on services, which are projected to grow by 8.6 per cent as in the earlier forecast.

Though with lower GDP the fiscal deficit is projected to be somewhat higher than that projected in the last forecast, buoyancy in industrial production, coupled with the rise in prices, curbs the deficit, which is projected to be 4.12 per cent compared with 4 per cent projected in April 2005.

The country's overall export performance has posted signs of deceleration during the first five months of 2005 (Jan-May), over the corresponding period in 2004. Decline in textile and readymade garment exports during January-March 2005 should be a major cause for worry, the Council said, adding that the authorities should take "quick measures to facilitate new investments in the manufacturing sector, particularly textiles and readymade garments.

It said that investor expectations seem to be moderate about expected returns, yet optimistic about the Indian economy. Though the recent spurt in the Sensex is likely to be based on strong fundamentals, the Council cited some reports that the sources of foreign institutional investors (FIIs) flows are concentrated in Japan and Taiwan through India-specific funds.

As such concentrated investment is likely to reverse very quickly, regulators need to be careful, the Council cautioned adding that much will depend upon on the first quarter results of the corporate sector. "If these results match expectations and last year's performance, the Sensex could stabilise at the current level. If not, it will have to correct, and in that case it might witness a freefall," the Council warned.

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