The Hindu Business Line : `8 pc growth rate may not be sustainable'

THE possibility of India achieving and sustaining 8 per cent GDP growth seems uncertain in the long run, according to PHD Chamber of Commerce and Industry (PHDCCI).

While the economy remains on course to achieve a growth rate exceeding seven per cent this year, thanks largely to normal monsoons as well as notable performance in industry and service sectors, "there is no convincing evidence regarding the depth of our economic growth," says the chamber.

PHDCCI attributes this to slow growth in savings and investment, halting pace of reforms and burgeoning fiscal deficit.

According to the chamber, the sustenance of eight per cent economic growth would require an investment to the tune of 30 per cent of GDP every year.

However, over the past five years, fresh investment has not been to the desired level. In fact, the investment rate has been hovering at about 24-26 per cent of GDP over the past few years.

Besides, the recent hike in interest rates in the US could impact global capital inflows. All this would have a significant impact on the Indian economy.

In its mid-term appraisal, the Planning Commission has also confirmed that gross capital formation of the public sector has steadily declined from 7.7 per cent of GDP in 1995-96 to 5-6 per cent in 2003-04.

A fiscal cut in public investment has an adverse impact on private investment, as a result of which aggregate investment remains weak. Hence, the stimulus to demand remains low.

The impact is felt on industry, which finds that an estimated 25-30 per cent of its production capacity is under utilised. Not surprisingly, the recent growth in industry, which has come largely from productivity gains and better utilisation of existing capacity, hasn't led to any increase in investment. With these investment rates, it may be difficult to sustain the present growth rates, the chamber argues.

Recent figures also suggest that there is a slow turnaround in the investment cycle. Capital goods production has slowed down from 19.2 per cent in May 2005 to 13.9 per cent in July 2005.

According to the chamber, the halting pace of the reforms process has become one of the major areas of concern. The reforms that need immediate attention pertain to effective labour reforms, disinvestment of non-strategic public sector undertakings, infrastructure and power sector reforms and reforming Central and State finances.

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