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Now PMEAC does a reality check,prunes growth to 5.3%

Council had projected 6.4% growth for current financial year in April.

Written by ENS Economic Bureau | New Delhi |
September 14, 2013 3:12:07 am

The Prime Minister’s Economic Advisory Council (PMEAC) has projected a 5.3 per cent growth rate for the economy in FY’14,sharply cutting down from its buoyant 6.4 per cent estimate made in April.

Also,while it says interest rates cannot come down till “stability in rupee is achieved”,it points out that without cutting them,“risk taking” by industry cannot happen.

The Council,chaired by C Rangarajan,is confident that despite the lower projected growth the economy will be able to finance an improved current account deficit of 3.8 per cent of the GDP. Its April estimate was much higher at 4.7 per cent.

Striking a cautious note the Economic Outlook for 2013-14 estimates the current account deficit will be $70 billion for the full year. This too,it says,cannot be financed by the combined inflow of foreign investment,instead requiring a drawdown of forex reserves by $9 billion.

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Speaking in Parliament last week,finance minister P Chidambaram had said he will treat the current account deficit projection of 3.7 per cent for the full year as “a red line which therefore cannot be breached”.

To match this arithmetic,the Rangarajan panel has cut the estimate of trade deficit from its earlier projection of $213 billion to $185 billion. It “yields a CAD of 3.8 per cent of GDP which is not exactly low,but apparently financeable”. He also adds that the prudent level of the deficit at the projected GDP rate should have been less than 2.5 per cent.

Speaking about the deficit in April,Rangarajan had said “it may take more than a year to return to a level that is acceptable”. The PMEAC issues two reports every year — a review of the economy and an outlook for the next fiscal.

After examining the declining profitability in the industrial sector,the panel notes that interest burden on the profits of the companies can come down only if interest rates come down or when there is a replacement of debt.

“In combination of increased leverage and higher interest costs,the pre-emption of EBITDA by interest expense has increased massively,” the Outlook points out and concludes that “such conditions are not conducive for risk taking”.

But pointing to the rupee volatility,the panel says it is difficult to specify when the cuts can begin. “If the current trend in the moderation of wholesale price inflation continues,which is in fact expected,the monetary authorities can switch to a policy of easing.”

New RBI Governor Raghuram Rajan is slated to announce his first take on monetary policy a week later on September 20.

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