The Hindu Business Line : NCAER raises GDP growth forecast to 7.9 pc

The National Council of Applied Economic Research (NCAER) has revised its growth projection for the current fiscal by a notch from 7.7 per cent in April to 7.9 per cent now, broadly in line with the forecast by the Prime Minister's Economic Advisory Council (EAC) on Monday here.

In its latest quarterly economic bulletin, the Council has contended that the GDP growth at 7.9 per cent is still lower than 8.4 per cent achieved last year.

FDI flows

However, the modest improvement in growth as compared to the April forecast is due to better performance of industrial and services sectors, essentially capturing the effect of higher levels of foreign direct investment (FDI) flows. It said the increased FDI flow constitutes an important trigger to investment activity. In the first four months of the calendar year 2006, FDI inflow was $2.5 billion as compared to less than one billion dollar in the same period of last year.

Referring to risks to the economy, the Council's assessment points to a slightly higher rate of inflation and greater pressure on fiscal balances, with the fiscal deficit of the Centre projected to display no improvement as compared to the situation during the last year. The current account deficit is projected to be 1.8 per cent of GDP.

High oil prices

It states that the higher oil prices have exerted pressure on the government to support higher levels of subsidies on petroleum products, especially in the case of kerosene, liquefied petroleum gas and high-speed diesel. It said the retail prices of petrol and HSD were raised in June 2006, but both the Central and State Governments absorbed a significant level of increase in the global prices by reducing tax rates. "By not passing on the higher prices, the Government is not promoting conservation, substitution and investments necessary for more efficient utilization of petroleum products," the Council warned. It said erratic monsoon and high-energy prices were constant reminders of the vulnerability of the economy to traditional shocks that often retarded growth at least in the short-run.

Even as the fiscal scenario for the Central government points to improved revenue collection, there is a `front loading' of expenditures. "If the expenditures are held to the budgeted levels, higher revenue collections would help in keeping the deficit to the targeted levels. However, increased spending on interest payments and subsidies can lead to slippages in deficit goals," it cautioned.

The Council noted that an important driver of economic growth in the last decade has been a positive global trade climate, which was achieved through long and hard negotiations on the part of nearly all the nations. A more ambitious round of trade talks, the Doha Development Round, has now been stalled due to disagreement over establishing modalities for cutting tariffs and subsidies. Hence, a resolution of these differences and the creation of a multilateral trade agreement would be far more beneficial to India than bilateral or regional pacts. This is particularly important since a conducive external trade environment is a precondition for achieving sustained high rates of economic growth and elimination of poverty, the Council noted.

Finally, on the ongoing debate following the publication of the Approach Paper to the Eleventh Five Year Plan, the Council said the success of the strategy entailing "inclusive growth" with considerable stress on agricultural growth and provision of essential services to a far greater proportion of people and stepped-up investment through public-private partnership in infrastructure development would all depend critically on how attractive the business environment would be for the private enterprises.