The Hindu Business Line : Optimism creeps in

The PM’s Economic Advisory Council’s growth projections are optimistic but to its credit the Council has also listed key obstacles to achieving the target.

Slow but perceptible changes for the better that have been visible in the organised economy over the past four months are beginning to reflect in policy sentiment. Against the 6 per cent growth estimate of the Reserve Bank of India, the Prime Minister’s Economic Advisory Council is optimistic of a 6.5 per cent expansion in GDP in the current year based largely on a fair growth in manufacturing and services. On the whole, the report’s tenor is largely optimist ic, its forecast modestly moving up on account of the prospects for industrial expansion but tempered by the dismal expectations from the farm sector. To its credit, however, the Council points to some key obstacles in the run up to the earlier growth levels of 8 or 9 per cent; it is these elements that policymakers would do well to focus on in the second half of the year.

The most palpable one is the prospect of inflation going out of control; policymakers have been predicting a rise in headline inflation to around 6 per cent by March end. By itself that would not be worrying since it is just a tad above the tolerable level; given the current levels of food prices, however, any uptick in general prices could fan inflationary pressures and hold up the pace of growth. Global recovery ironically is not an unmixed blessing: it will, of course, push up India’s exports but will also drive crude and other commodity prices higher, doing no good to the efforts to contain domestic inflation. Yet it is strong growth that can overcome the worst effects of that inflation contagion, and here India has had an auspicious start. Capital flows this year have been fairly robust and, interestingly, inbound foreign direct investments have risen faster than portfolio investments. The Council expects the year to end with around $37 billion of inbound FDI and some $25 billion into the equity and debt markets. That the country is attracting more FDI is a healthy sign from the viewpoint of structural gains for the economy for, as the Council points out, one of the biggest weaknesses of the economy is its physical infrastructure, especially electricity, with the delays suffered by power projects in the state sector being glaring.

The Council rightly points to this lacuna as the biggest impediment to future growth. Its solutions are obvious; greater private sector participation, the search for other fuel sources and nuclear power generation. What is needed is the right policy environment for radical improvement.

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