Rangarajan panel cuts 2013-14 growth to 5.3%, but sees no case for downgrade

The Prime Minister’s Economic Advisory Council has said the Government may have to dip into the forex reserves to bridge the current account deficit. This contrasts sharply with Finance Minister P. Chidambaram’s confidence that foreign funds flow would finance CAD.

In line with the Finance Ministry, the Council put the CAD at $70 billion, or 3.8 per cent of GDP, but did not think the net capital flows (total foreign institutional investment, foreign direct investment, external commercial borrowing and non-resident Indian deposits) would finance it. The Government will have to draw from the forex reserves, the panel said and put the amount at $9 billion.

The Council pegged down the growth rate for 2013-14 to 5.3 per cent from its previous projection of 6.4 per cent, but said there is no case for any downgrade of India’s sovereign rating as the Government has already taken a host of reform measures.

“The rating agencies have been talking about the reforms having been put on the back burner. But that is no longer true. Many important legislations were passed ... I would think the rating agencies have no case for any downgrading,” said C. Rangarajan, chief of the Council, after releasing the Economic Outlook 2013-14.

The Council revising the growth rate is the latest in a slew of pessimistic forecasts, including by the RBI that lowered its growth projection for this fiscal to 5.5 per cent from 5.7 per cent.

“The Council is looking at a rate of economic growth of 5.3 per cent in 2013-14, lower than that indicated (6.4 per cent) in its April 2013 review,” the report said, adding currency related disruptions have impacted the momentum of recovery.

Emphasising the need for a stable rupee, Rangarajan said the Reserve Bank of India must continue its tight monetary policy. He did not set a time-frame for policy easing, saying that will depend on the stability in the forex markets. This assumes significance with the Monetary Policy coming up for a review on September 20.

Rangarajan expects the economy to do better in 2013-14 second half, once the impact of the measures to promote growth kick in. The Council expects good news on the farm front, and pegged agriculture growth at 4.8 per cent hoping for a record production of foodgrains, pulses and cotton, buoyed by good rains.

This, it said, will moderate food inflation though some upward pressure will come from the depreciating rupee. The Council put inflation at around 5.5 per cent by March 2014. It expects industry to grow at 2.7 per cent (2.1 per cent in 2012-13) and services sector at 6.6 per cent (7.1 per cent).

The Council sees gold imports dipping to $38 billion this fiscal from $53.8 billion despite some demand pick up in the festival season. The numbers for July and August indicate a sharp decline in gold imports, it said.

(This article was published on September 13, 2013)
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