EAC sees monetary tightening

Revised opinion The economic advisory panel is likely to revise its growth projections to between 7.5% and 8% from its previous estimate of 8.5%.

Even as global ratings agency Moody’s warned on Monday that India’s sovereign ratings outlook could be lowered (from the current ‘stable’ outlook) if the country’s fiscal policy fails to check external shocks or aggravates inflation concerns, the government is finally beginning to accept the prospect of economic growth moderating to around 8 per cent this fiscal, from 9.0 per cent GDP growth in 2007-08.

The Prime Minister’s Economic Advisory Council (EAC), in its upcoming economic outlook report, is likely to pare GDP growth projections for 2008-09 to 7.5-8 per cent, from its earlier estimate of 8.5 per cent. The key reasons for tempering expectations, according to the EAC, are soaring inflation, rising crude oil prices, as well as the slowdown in industrial activity and foodgrain supplies.

In its quarterly review of monetary policy last week, where key rates were raised again, the Reserve Bank of India already lowered GDP growth projections to 8 per cent from its earlier estimate of 8-8.5 per cent. The EAC’s economic outlook report is expected to suggest further tightening of monetary policy. So, another round of rate hikes appears imminent, say government officials.

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“Domestic and international factors at play require that the government continues to raise interest rates, even at the cost of growth. It has to explore other mechanisms to further tighten monetary policy to control inflation. And this will bring down the growth rate,” a member of the EAC said.

Present monetary policies would have an impact as long as international oil prices hover at around $130 a barrel. But the EAC expects international crude oil to touch a high of $150 a barrel during the winter, as demand goes up, particularly in western countries. “It will be difficult for India to handle the situation then,” the member said, adding that current measures to contain inflation and manage oil prices are unlikely to be effective.

To counter that prospect, the EAC is expected to ask the government to absorb the excess liquidity in the system. “There is simply too much money in the system. The present level of 20-22 per cent money supply growth is much too high. It has to be soaked up and brought down to RBI’s target level of 16-17 per cent,” the member said.

The EAC’s economic outlook report, with suggestions from its members regarding steps to be taken to tame inflation, tackle the foodgrain crisis and rising oil prices, is expected to be presented to the Prime Minister some time next week.