Highlights of Economic Outlook 2011-12

Published by Roma Rahul Gupta for Chhattisgarh Online
Highlights of Economic Outlook 2011-12


The Chairman Economic Advisory Council to the Prime Minister, Dr. C. Rangarajan released the ‘Economic Outlook 2011-12’ in New Delhi today. Following are the highlights:

1. Country’s growth pegged at 8.2 percent for 2011-12
2. Inflation to ease to 6.5 percent only by the end of this fiscal
3. Important role for fiscal policy to contain demand pressure
4. RBI will follow tight monetary policy till inflation shows definite signs of decline
5. Agriculture to grow at 3 percent as monsoon to remain more-or-less normal
6. Industry to expand by 7.1 percent, slower than the rate of 7.9 percent last year
7. Services to grow at a faster rate of 10 percent
8. Global economic and financial situation unlikely to improve
9. Important to increase investments if economy is to grow at 9 percent
10. Investment rate projected to rise to 36.7 percent in 2011-12
11. Current account deficit projected at $54 billion or 2.7 percent of GDP
12. Merchandise trade deficit at $154 billion or 7.7 percent of GDP
13. Foreign direct investment set to rise to $35 billion in current fiscal
14. Foreign institutional investor inflows to slip to $14 billion, less than half of last year

Description:

The Prime Minister's Economic Advisory Council (PMEAC) on 1 August 2011 scaled down its projection for the growth rate of the economy in 2011-12 to 8.2 per cent from 8.5 per cent earlier. The estimates were made in the backdrop of a grim economic scenario resulting from uncertain global outlook and high domestic inflation coupled with a subdued trend in investment and factory output.

Projections

 The report stated that the inflation rate would come down to 6.5 per cent by March 2012. In its Economic Outlook for 2011-12, which was submitted to Prime Minister Manmohan Singh last month, the PMEAC had maintained that headline inflation would remain at 9 per cent or higher till October 2011 and thereafter ease to 6.5 per cent by the end of March 2012. The Council estimated the headline WPI inflation rate to continue to be at 9 per cent or higher in the months of July-October 2011.

The country's agriculture output was projected to grow at 3 per cent in the current fiscal 2011-12 as against 6.6 per cent in 2010-11. The 2011 monsoon was projected to be in the range of 90 to 96 per cent of the Long Period Average (LPA). As a result, the farm sector output expected to grow at 3 per cent.

The overall uncertain environment India and abroad led to a slowdown in investment as well as inflow of foreign capital and as a result, the industrial performance weakened. In 2011-12, the industrial sector is expected to grow by 7.1 per cent as compared to a higher 7.9 per cent expansion in 2010-11.

The services sector, which has a share of over 50 per cent of the GDP was projected to grow at 10 per cent this fiscal, down from 10.3 per cent estimated earlier.

With regard to fiscal deficit, the Council expects the government to achieve its target for 2011-12 at 4.6 per cent but it would be at 4.7 per cent with off-budget liability of 0.1 per cent for the Centre and 2.1 per cent for States.

According to the PMEAC report capital inflows in 2011-12 were likely to go up to $72 billion from $61.9 billion in 2010-11. The investment rate was projected at 36.4 per cent in 2010-11 and 36.7 per cent in 2011-12. The domestic savings rate, as a ratio of the gross domestic product (GDP) was projected at 33.8 per cent in 2010-11 and 34 per cent in 2011-12.

Suggestions & Analysis

It was noted that the revised series (2004-05) for Index of Industrial Production (IIP) showed an output growth pattern that is fairly different from what the old series (1993-94) had indicated. Also, the output growth was grossly underestimated by the old series in 2007-08 and overestimated in 2008-09 and 2009-10.

The PMEAC stressed on the urgent need to ensure that the Goods and Services Tax (GST) materialises by 2012-13 as the GST along with the Direct Taxes Code (DTC) would play a key role in the medium-term as it would help in the government's efforts to boost revenue and reduce tax arrears.

The report called for increase in efforts to collect larger revenue and resolve cases to reduce tax arrears. It also highlighted that avoidable expenditures must be minimised and wanted measures to be initiated to increase revenues.

The council upon analysis of the recent data on growth rates indicated that while most of the lower income states had shown stronger growth rates, several of the higher income states had also shown an increase.

Also it was stated that given the country's growth needs, a moderate trade deficit and current account deficit (CAD) were inevitable. To finance the CAD, foreign investment flows were needed to be promoted. However, CAD must be contained below 2.5 per cent of GDP, it said.
The PMEAC stressed that the India growth story was inextricably linked to the power sector.

Policy interventions were required for ensuring coal availability for the power plants, land acquisition and environmental clearances and revision of power tariff by states to reduce the high aggregate technical and commercial losses. The report also called for increased focus on non-conventional energy.

The council on the question of food security mentioned that there was need to grant the poor a legal entitlement to food through an appropriate legislative enactment. The report also stressed the need for reforms in the public distribution system (PDS) to strengthen distribution. It pointed out that computerization, introduction of smart cards and using unique identification numbers for the beneficiaries are important interventions.

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Highlights of Economic Outlook 2011-12