Economy to grow 7.5-8% in FY’13, if global cues turn favourable: PMEAC

Indian economy is expected to grow at 7.1% in FY’12, marginally higher than the 6.9% projected by Central Statistical Organisation’s (CSO) advance estimates, as per the Prime Minister's Economic Advisory Council (PMEAC). Further, growth in FY’13 has been projected to be around 7.5-8% if the global environment turns favourable. PMEAC, Chairman, C Rangarajan, while releasing the document ‘Review of the Economy 2011-12’, has stated that the slight improvement in growth numbers is expected to come from the agriculture and construction sectors, which are expected to perform better as compared to advance estimates.

As per PMEAC, growth in agriculture is expected to be 3% backed by strong growth in horticulture and the animal husbandry sectors. The construction sector, backed by better growth in cement, will see an expansion of 6.2%. Manufacturing is expected to grow at a disappointing rate of 3.9% whereas growth in services will be strong at 9.4%, and the electricity sector has done well.

Gross fixed capital formation (GFCF) as a proportion of GDP is expected to slip to 29.3% registering a decline of almost 4% points over the last four years. However, an improvement of 1.5 to 2.0 percentage points of GDP can be expected in 2012-13. This is expected to happen due to improvement in domestic demand on the back of stabilizing inflation.  The weaker currency is also likely to improve the prospects for net export demand.

Headline inflation is projected to be around 6.5% at the end of March 2012, due to the effective use of monetary policy by the RBI. However, adjustments made to the selling prices of sensitive refined petroleum products to cover costs and reduce the huge burden of subsidy being borne by Government and the oil companies, will be passed on to 2012-13 and will express itself on headline inflation. Inflationary pressures will continue to ease through 2012-13 and will remain around 5-6% for the year.

Further, the Balance of Payments situation remains tight due to larger than expected Current Account Deficit (CAD) and lower than expected net capital inflows. Though there has been some recovery in the CAD during January and February 2012, thanks to the appreciating rupee, the BoP position remains stretched and CAD is expected to be at 3.6% of the GDP in FY’12. The CAD for the year 2012-13 will be 3%, however PMEAC has recommended that it will be judicious to try and limit the CAD, over the medium term, to between 2-2.5% of GDP.

Also, on the capital account side, the report has recommended that capital inflows, especially those in the form of equity, must be encouraged and improved domestic conditions for investment and growth are the basic pre-requisites, along with fundamental macroeconomic stability, i.e. prices, exchange rate and fiscal balances. The fiscal deficit is expected to go beyond the budgeted 4.6% of GDP, primarily due to much higher than budgeted subsidies - especially that on refined petroleum products.

Rangarajan has expressed his concerns about the growing fiscal deficit and has said that the government must strive to contain it as a large subsidy bill directly reduces the resources that are available for development expenditure. While expanding the borrowing needs of Government it also squeezes investible resources and undercuts productive investment by the private sector. He has also recommended that the government incontestably demonstrate that it is on the path of fiscal consolidation and thus reinforce the final pillar of macroeconomic stability.

The PMEAC Chairman is also of the view that the government, in FY’13, should express itself most powerfully in the infrastructure sector - in power, roads, railways, ocean ports and air ports, in rural and urban infrastructure. This is because the inadequacy of infrastructure availability continues to act as a constraint for the expansion of economic activity across the country. Also it is likely that the targets set for 2011-12 in power and roads may be achieved. Hence, the government must set ambitious targets for 2012-13 for both capacity creation in key infrastructure areas and operational performance, especially in the coal sector, such that a fillip is provided to the improvement of economic activity in 2012-13, which is also the first year of the Twelfth Plan.