The Hindu Business Line : NCAER sees GDP growth slowing to 7.7%

Economic update
The independent policy-research said its forecast does not take into account the recent projection of a seven per cent shortfall in the coming monsoon.
The Government should take advantage of the prevailing low level of inflation to make adjustment on retail prices of petroleum products.

New Delhi , April 27

The National Council of Applied Economic Research (NCAER) foresees "a slight deceleration" of economic growth to 7.7 per cent in the current fiscal from 8.1 per cent achieved in 2005-06, taking into account the Union Budget 2006-07 and subsequent announcements of the Foreign Trade Policy and the annual monetary policy.

Presenting its quarterly economic update at a seminar to mark its golden jubilee year here, the independent policy-research said its forecast does not take into account the recent projection of a seven per cent shortfall in the coming monsoon. This would be reflected in the first update of the forecast in August.

The council said exports are expected to remain buoyant but in dollar terms to decline from 24.7 per cent in 2005-06 to 18.9 per cent this year. Similarly, imports growth may also decline from 31.5 per cent to 25.2 per cent during the same period. Prices are expected to rise marginally compared to last year.

Inflation

Average inflation is likely to be 4.3 per cent, though inflation would depend on global crude prices and how much of it is passed on to the domestic market.

The council has currently factored an 8 per cent rise in domestic crude prices.

The council opined that since global crude oil prices are showing no sign of abating, the Government has to revise retail prices of petroleum products upwards, sooner or later, which would exert pressure on inflation.

The Government should take advantage of the prevailing low level of inflation to make adjustment on retail prices of petroleum products.

Fiscal deficit

Stating that fiscal deficit is likely to decline but marginally higher than the budget estimate, the council contends that the recently announced annual supplement to the trade policy has added to some of the fiscal consolidation problems.

The faster growth of imports, compared to exports, may result in current account deficit of 1.7 per cent of GDP at market prices. However, the council hastens to add thus: "the high level of foreign exchange reserves, the continuing flow of foreign exchange from portfolio investments, the buoyant goods and services exports are good cushions."

Commenting on the forecast, the NCAER Director-General, Mr Suman Bery, who chaired the seminar, said

"We have potential for even faster growth if the Government demonstrates its willingness to back reform despite political constraints. Private investment in infrastructure could be a major driver of growth if the regulatory environment is conclusive. This could pick up the slack as the housing market cools."

While acknowledging the fact that trade in services has stood the country in good stead on the balance of payment front during the last decade, merchandise exports have started facing infrastructural bottlenecks as well as policy impediments arising from "continued shirk on reforming labour and exit laws."

Even as fiscal consolidation at central level is on track, the council notes that much remains to be done at the State-level.

The most important fact for this fiscal is that the RBI will not be subscribing to the Government of India bonds or in other words, the Government is going to stop borrowing from the RBI.

"The borrowings would be done from the market and unless the Government improves its fiscal position, the borrowing would be at higher coupon rate, which may deteriorate its fiscal position further," the council cautions.