Economic Outlook for 2010-11

Highlights:

• Economy to grow at 8.5 per cent in 2010-11 and 9.0 % in 2011-12
►Agriculture grew at 0.2% in 2009-10. Projected to grow at 4.5% in 2010-11 and 4.0% in 2011-12.
► Industry grew at 9.3% in 2009-10. Projected to grow at 9.7% in 2010-11 and 10.3 % in 2011-12.
►Services grew at 8.5% in 2009-10. Projected to grow at 8.9% in 2010-11 and 9.8% in 2011-12.

• Slow recovery in global economic and financial situation

• Rising domestic Savings and Investment chief engines of growth
► Investment rate is expected to be 37% in 2010-11 and 38.4% in 2011-12.
►Domestic savings rate is expected to be over 34% in 2010-11 and close to 36% in 2011-12.

• Current Account deficit estimated at 2.7% of GDP in 2010-11 and 2.9% of GDP in 2011-12
► Merchandise trade deficit projected to be $ 137.8 billion or 9% of the GDP in 2010-11 and $160 billion or 9.3% of GDP in 2011-12.
► Invisibles trade surplus projected to be $ 96 billion or 6.3% of the GDP in 2010-11 and $109.7 billion or 6.4% in 2011-12.

• Capital Flows can be readily absorbed by financing needs of the high growth of the Indian Economy.
► Against the level of $53.6 billion in 2009-10, the capital inflows projected to be $ 73 billion for 2010-11 and $91 billion for 2011-12.
► Accretion to reserves was $13.4 billion in 2009-10. Projected to be $30.9 billion in 2010-11 and $39.8 billion in 2011-12.

• Inflation rate projected at 6.5 % by March 2011 due to expected normal monsoon combined with the base effect.
►The provisional headline inflation was above 10% in June 2010.
► Controlling high inflation rate essential for sustainable growth in medium term.
► Available food stocks must be released to have a dampening effect on prices.

• Monetary Policy to complete the process of exit and operate with bias toward tightening.
► Credit off take picked up. Strong growth rate in the 1st quarter of 2010-11.
► Fund flow from capital market to commercial sector quite strong. Bond issuance growth relatively higher than issuance of equity.
► Liquidity conditions are taut enough for monetary policy signals to be appropriately transmitted to the financial sector. A bias toward tightening is necessary.
► Exchange rate variations will remain within acceptable range.

• Exit from the expansionary fiscal policy not only feasible but also necessary
► High buoyancy in direct and indirect tax collections. Telecom auctions and decontrol of the petroleum products prices to provide additional cushion.
► Fiscal deficit outturn may be lower than the budgeted consolidated fiscal deficit of 8.4% of GDP for 2010-11.
► Revenue Deficit as a ratio of GDP expected to decline from 6.3% in 2009-10 to 4.6% in 2010-11.
► Operationalization of Goods and Services Tax (GST) should be a priority.
► Budgeted level of Fiscal Deficit and Revenue Deficit still beyond comfort zone.
► Need to rationalize the food and fertilizer subsidies.

• To sustain a growth rate of 9.0 per cent, focus is required on:
►Containing inflation
► Improving farm productivity
► Closing the large physical infrastructure deficit, especially in the power sector

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Haider Ajaz