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TMI BlogEconomic Outlook for 2010/11X X X X Extracts X X X X X X X X Extracts X X X X ..... Economic Outlook for 2010/11 - News and Press Release Dated:- 3-8-2010 - News - CONCLUDING COMMENTS AND SOME POLICY ACTIONS 1. In summary, the Indian economy would grow at 8.5 per cent in 2010/11. There will be a substantial jump in the growth rate of agriculture and allied activities. Given the present trends in the South West monsoon, it is reasonable to expect agriculture to grow at 4.5 per cent. Both industry and services will grow at a rate which is a shade higher than the previous year. The growth momentum will continue into 2011/12 and the expectation is that the economy would grow at 9.0 per cent in that year. The strengthening of the global economic recovery will help to sustain the higher growth rate. 2. The domestic savi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs rate which had fallen in 2008/09 is expected to pick up substantially in 2010-11. We estimate the savings rate at 34.3 per cent of GDP in 2010/11 and the corresponding investment rate will be 37.0 per cent. These savings and investment rates will further improve in 2011/12. These rates should enable the economy to grow in a sustained manner at 9 per cent. 3. The Reserve Bank of India has projected the current account deficit for 2009/10 at 2.9 per cent of GDP. There is every possibility that this may be revised downwards. We have projected the current account deficit for 2010/11 at 2.7 per cent of GDP. The merchandise trade deficit will be high at 9.0 per cent. But the invisibles including remittances will constitute 6.3 per cent of G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DP. The expected capital inflows during 2010/11 will be $73 billion. This will be adequate to cover the current account deficit and add to the reserves by $31 billion. While the current account deficit in 2011/12 is projected at 2.9 per cent of GDP, the capital inflows may be stronger at $90.5 billion. Thus while we should focus on the efforts to contain the magnitude of merchandise trade deficit, given the expected level of capital flows, there will be no problem in financing the current account deficit. Since the capital flows are expected to be moderate, they should not pose any problem to the management of the exchange rate. Exchange rate variations will remain within an acceptable range. 4. Inflation has remained a major source of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern in the economy for more than a year. The overall WPI inflation rate has remained at double digit levels for the past five months and the consumer price inflation for much longer. Inflationary expectations, particularly food inflation expectations, will be moderated because of the projected normal monsoon. Food prices have already begun to soften. Combined with the base effect, we expect inflation rate to fall to around 6.5 per cent by March 2011. The available food stock must be released in a manner that they have a dampening effect on prices. The behaviour of inflation will also be a major concern for monetary authorities. Against the background of inflation rates that are more than twice the comfort level, monetary policy has to ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate with a bias towards tightening. This is essential to promote conditions for sustainable growth in the medium term. Policy Action 5. In the area of economic policy, there are clearly three issues that are, and will continue to remain, of primary importance in ensuring sustainable economic growth at rates of 9 per cent or higher. The first is containing inflation, the second is ensuring steady improvement in farm productivity and incomes, and the third is closing the large physical infrastructure deficit, especially in the power sector. Inflation 6. There is a strong linkage between the objective of containing inflation and increasing farm productivity. This is because high rates of inflation in India are most often connecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to, and preceded by, high rates of food price inflation. The latter is inevitably linked to shortages of supply caused by the vagaries of the weather and other factors that cause output to fail to respond to rising demand. This has been clearly brought into focus, by developments over the past one-and-a-half years. The sharp increase in the price of rice and pulses through the second half of 2008/09 overlapped a period when the global crisis caused manufactured goods and energy prices to drop sharply and this declining trend was reflected in India also. The inflation in food items in the second half of 2008/09 ranged between 7.5 and 11.0 per cent, largely on account of the increase in prices of rice, pulses, coarse cereals and fruits ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... getables. The trend was sharply accentuated by the deficient monsoon of 2009 which led to sizeable output losses in rice, coarse cereals and pulses. It can be readily argued that the price increase in primary food articles starting from the summer of 2009 was on account of output losses — both feared and actual — to the bad monsoon. However, it would be hard to explain the high inflation rates since September-October 2008, well before the weak monsoon of 2009, and in a year that had record foodgrain output on the grounds of shortfall in output. 7. Clearly there are demand factors also at work. There is strong evidence to show that economic growth in India since the early years of this decade has been quite broad-based across States, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formerly under-performing States registering strong growth. There is also evidence to show that rural development schemes, particularly MGNREGA and Bharat Nirman, as well as other initiatives taken to improve livelihood potential in rural India, have succeeded in raising employment and incomes. This is reflected in anecdotal evidence about lower incidence of migration from economically weaker areas, both as farm hands as well as unskilled manual labour in urban areas. While the increase in disposable income does not lead to proportionately higher expenditure on food at higher income levels, that is not necessarily the case at lower income levels on account of substitution of superior food, over (perceived) inferior ones, as well as higher p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hysical consumption. It would, therefore, be reasonable to infer that higher disposable incomes amongst the poorer sections of rural India would have boosted demand for primary food and that would, in turn, have created pressure on prices. The primary means of responding to higher demand for food would have to be greater production, and also better distribution. 8. High rates of food inflation have been followed by an increase in inflation in non-food manufactured goods. This is, without doubt, in part a response to strong domestic demand riding on the robust economic recovery, which in the backdrop of improvement in world commodity prices has returned some pricing power to manufacturing firms. However, a major contributing factor, and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rhaps the most important one, is the increase in money wages that is a direct consequence of higher food prices reflected in high double digit consumer price inflation. Farm Productivity 9. Clearly the success in easing the pressure on food prices is inextricably linked to raising food output, that given the fixed supply of cultivable land, necessarily means raising productivity. India is a complex mosaic of agroclimatic regions. We must take this into account while developing a strategy for sustainable growth in farm productivity that plays to the inherent strengths of these regions while mitigating the weaknesses. The management of water supply for irrigation is a critical element. Ground water has, over the decades, become the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal source of incremental irrigation, as well as of drinking water. Watershed management and recharging structures are vitally important to make, use of ground water sustainable. On the user side, technologies that provide irrigation with more economical use of water have to be encouraged. This includes drip irrigation wherever possible and sprinkler irrigation in other areas. Paddy is the most important crop in India and the System of Rice Intensification (SRI) holds encouraging potential for outcomes that combine high productivity with lower water use. Micro-nutrient management and increasing the organic content of the soil offer considerable scope for improving productivity on a sustainable basis. Horticulture, animal husbandry fish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery also offer significant potential to increase not only farm incomes, but also nutritional levels across the board. 10. Thus, the twin objectives of containing food price inflation and improving farm productivity and incomes can best be achieved by improved water and soil management techniques combined with better farm practices and cultivation of a wider range of crops. We need to develop an integrated approach to these issues. Infrastructure 11. In the first three years of the Eleventh Plan, there were considerable shortfalls in the completion of infrastructure projects. In the power sector, as against a planned target for creating 78,740 mega watts (MW), it appears we would be lucky to get 62,000 MW by March 2012. This rests on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... large capacities being commissioned in 2010/11 and 2011/12. In the current fiscal, the target for capacity commissioning is 21,441 MW, of which over 6,600 MW is in the private sector, about 6,900 MW in the State sector and 7,900 MW in the Central Sector. In order to fulfil these annual targets, the projects need to be closely monitored. This aspect (of close monitoring) will continue to have great relevance in the years to come. The reality is that failure to create physical infrastructure in time has not only been persistent, but has also been a binding constraint on the expansion of manufacturing output, and this has been a significant contributor to lower competitiveness. On an average, medium and large manufacturing establishments use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... captive power for one-quarter to one-third of their requirement. In most cases the cost of captive generation is much higher than grid-power, which in conjunction with the capital costs that are involved in setting up such captive power facilities, burdens manufacturing units with sizeable additional cost. This increases their manufacturing cost and erodes their competitiveness vis-à-vis producers in other countries. Small manufacturing enterprises which cannot afford captive generation have been pushed to the wall. Anecdotal evidence suggest that not only has there been a large number of closures of small enterprises on account of acute shortage of grid power, but it has prevented new, small manufacturing units from coming up. It is, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, imperative to rapidly improve power availability so that the industrial sector, including small enterprises, can expand in a manner commensurate with their underlying potential and go on to create the millions of industrial sector jobs that are necessary to realise 9% plus growth . 12. In previous reports, the Council has underscored the importance of accelerating the pace of capacity creation in the power sector and reforming the distribution set-up in order to attract greater private investment. Increasingly, it appears that the expansion and reform of the power sector must have primary importance in public policy. It is necessary that we tackle the problems inherent in this sector with determination and develop a timeline to real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise our objectives. 13. In the power sector, fuel has increasingly become another limitation. In the medium to long term, we have to broadbase our fuel usage to encompass nuclear power, natural gas and renewable sources and reduce the proportion of coal. - News - Press release - PIB Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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