The Hindu Business Line : NCAER raises GDP growth estimate to 8.9%

New Delhi, Oct 31The National Council of Applied Economic Research (NCAER) has revised its projection of gross domestic product (GDP) growth for the current fiscal to 8.9 per cent from its August estimates of 8.5 per cent, spurred by “speedier growth of agriculture and services”.

In its latest quarterly review, released here on Wednesday, the Council contends that in the case of agriculture, the factors that have led to higher growth rate are exogenous — better price conditions for the year; while in the case of services, the momentum of growth in telecommunications and financial services is likely to continue.

In the case of industry, the Council notes that despite the investment climate continuing to be strong and capable of sustaining investment expenditure, the slower growth of exports is a dampening factor. It noted, in particular, the decline in the index of industrial production for consumer durables in April to August 2007 as compared to the average for the same period in 2006.

“The appreciation of the rupee, a weak external environment and domestic financing constraints are expected to slow down industrial growth in the coming quarters”, it warned.

Inflation

Stating that the overall rate of inflation is slower at 4.5 per cent for the year as a whole, the Council said this reduces the growth in current tax revenues. The current account balance is projected to be lower mainly because of exchange rate appreciation.

It said that notwithstanding the decline in the annual headline inflation rate based on the wholesale price index, the pressures on economic policies have increased on the management of external capital inflows. “With the sharp rise in capital inflows, particularly ‘short-term capital flows’— as portfolio funds are often viewed — the exchange rate of the Rupee has appreciated by about 10 per cent year-on-year (YOY) in the first five months of the current fiscal year”, the review said adding that export competitiveness is under threat as annual growth in rupee terms was below six per cent during Apr-Aug 2007.

At the end of the second quarter of the current fiscal, both the six-country Nominal Exchange Rates (NEER) as well as the Real Exchange Rate Index (REER) have appreciated by 9.5 per cent and 12.2 per cent respectively on YOY basis, it said cautioning that the situation is less likely to reverse soon. “It would therefore be pragmatic if Indian industry adjusted itself to a stronger currency and diversified towards value addition on imports rather than concentrating on specialised domestic, input-based activities”, the Council said.

Pros and cons

The Council’s review terms “positives” in the economy as lower inflation rate, easing of interest rates towards the end of first half of the current fiscal and strong inflows of external capital in the form of portfolio funds, while the “negatives” include slower growth of bank credit to the commercial sector, hardening global petroleum prices and slower growth in exports, especially in rupee value, which determines the profitability of exporters.