EAC says GDP to drop, inflation to rise

Rising prices, turbulence in global financial markets and a possible reversal of the US dollar is likely to lower...

Rising prices, turbulence in global financial markets and a possible reversal of the US dollar is likely to lower India8217;s GDP growth to 7.7 per cent this fiscal from 9 per cent last year even as inflation could spiral to 13 per cent over the coming months, the Prime Minister8217;s Economic Advisory Council EAC warned today.

Releasing the Economic Outlook 2008-09, outgoing chairman of the EAC, C Rangarajan, argued that considering the magnitude of adverse economic developments in 2008, the projected drop from 9 per cent last year to 7.7 per cent 8220;is in fact modest8221; and attributed the slowdown to deterioration in global conditions. He warned of a possibility of food price inflation in the country. 8220;The achievement of a reasonable rate of growth in the Indian economy is built on the presumption of a slow return to normalcy in global financial market conditions,8221; he said

Saying that inflation could shoot up to 13 per cent, owing to a surge in prices of commodities and underlying resource tightness, the council said that coordinated policy action coupled with monetary tightening by the Central bank could help ease inflation to 8-9 per cent by March 2009. Rangarajan said the tight monetary policy stance was imperative till the pace of inflation moderated.

Because of the risks arising out of growing off-budget liabilities, the fiscal situation too has deteriorated significantly. According to the report, off-budget liabilities in the form of fertiliser, food and oil subsidies coupled with unbudgeted subsidies such as the farm loan waiver, the NREGA scheme and the implementation of the Sixth Pay Commission could amount to 5 per cent of GDP. This is above the budgeted fiscal deficit of 2.5 per cent for the current fiscal.

Speaking of agriculture, Rangarajan defended the bleak projection of a 2 per cent growth in the sector, saying that the slide was, in part, the result of the high growth in the previous year, which acted as the base for this year8217;s figures. The outlook report also attributed the slide to the weak southwest monsoon.

In the manufacturing sector, the EAC has projected a growth of 7.2 per cent 8212;significantly lower than what was achieved in the past four years. In the power, gas and water supply sector, the council expected that the generation would improve in the balance part of the current fiscal and the overall GDP in the sector is likely to grow by 6.5 per cent, about the same level as in the previous year.

It said the GDP in the industrial sector is expected to be 7.5 per cent, about 1 per cent below what was recorded in the previous year on slower domestic consumer demand growth and weaker expansion of export demand. The services sector would grow by 9.6 per cent in 2008-09, lower than in any of the previous three years.

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7.7Projected growth in GDP for current fiscal, down from previous fiscal8217;s 9

13projected rise in inflation

Projected sectoral growth

agricultural 2

manufacturing 7.2

Power, gas 038;

water supply 6.5

industrial 7.5

Services 9.6