New Delhi, Feb. 22: Economic growth is likely to pick up pace next fiscal at 7.5-8 per cent and even manage a faster rate if the global environment turns favourable, the prime minister's economic panel said today.
The panel said it expected the economy to grow 7.1 per cent this fiscal, which is a tad more than the 6.9 per cent projection made earlier this month by the Central Statistical Organisation.
"We might be able to achieve an 8 per cent growth ... provided we take some of the corrective actions," C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said.
"To get back to 9 per cent growth, we need a more hospitable global environment. Until the global situation clears, we should be able to achieve an 8 per cent (annual) growth."
The projected GDP (gross domestic product) growth for 2011-12 is substantially lower than the budgetary target of around 9 per cent. High interest rates, fragile global economic conditions and the government's inability to push through key reforms have stunted growth.
Rangarajan said the growth projections were marginally higher than the CSO estimate as agriculture and construction were expected to do well and the performance of all other sectors was expected to remain the same.
The economy was growing at over 9 per cent before the financial meltdown of 2008 pulled down the growth rate to 6.7 per cent in 2008-09. The economy recorded a growth rate of 8.4 per cent in 2010-11.
Inflation, which has remained at an elevated level in 2011, would moderate to 6.5 per cent by March-end and 5-6 per cent in the next fiscal, Rangarajan said.
While the retail inflation based on Consumer Price Index (CPI) was 7.65 per cent in January, the Wholesale Price Index (WPI) inflation was 6.55 per cent.
"Headline inflation has shown a decline since November 2011 and more strongly in January 2012. It is projected to be around 6.5 per cent at the end of March. Both monetary and other public policies seem to have had the desired effect," Rangarajan said.
The panel expressed the need to undertake reform measures, cut down subsidies, decontrol diesel prices and improve the tax-to-GDP ratio.
Investment activity has slowed and as a result gross fixed capital formation for 2011-12 has slipped to 29.3 per cent of GDP, a decline of almost four percentage points over the last four years, said Rangarajan, a former governor of the RBI.
Rangarajan said the fiscal deficit was likely to expand beyond the budgeted estimate of 4.6 per cent of GDP, mainly because of increased spending on subsidies.
"The government must strive to contain and improve the efficacy of subsidies vis-a-vis the development needs that have to be carved out of the Union budget," the PM advisory council said in the review, stressing the need for fiscal consolidation.
Rangarajan said, "It will be necessary during 2012-13 to make some adjustments in the diesel price in a phased manner. We have not done this for quite some time and international crude prices have gone up ... It is not possible for us to subsidise this sector beyond a level."
Diesel prices were last hiked in June 2011. However, the government had cut excise and customs duties to cushion the impact of the price rise, thus sacrificing an annual revenue of Rs 38,000 crore.
Rangarajan said, "Partial reforms in the fertiliser subsidy regime by introducing nutrient-based subsidisation will not be effective unless the price of urea is decontrolled or at least raised substantially."
The government expects that its subsidy bill will increase by Rs 1 lakh crore to Rs 2.34 lakh crore, mainly on account of higher outlay towards fertiliser, food and oil.
On improving the tax-to-GDP ratio, Rangarajan said the excise duty and service tax should be increased to the pre-crisis level, a move which will bring in Rs 35,000 crore.
Before the economic crisis, service tax and excise duty rates were at 12 per cent, but as a stimulus the government had brought them down to 10 per cent in 2008-09.
"If you go back to 12 per cent... as a back-of-envelope calculation, you can get an additional revenue of Rs 35,000 crore," Rangarajan said.
Rangarajan said the mismatch between current account deficit and capital flows has put pressure on the rupee, which has weakened against the dollar.
"The current account deficit this year may turn out to be higher than last year ... Efforts must be made to keep the deficit around the manageable level of 2.5 per cent of GDP," Rangarajan said. The panel expects current account deficit to be 3.6 per cent for the year as a whole.
Rangarajan expects the deficit for 2012-13 to be around 3 per cent. He also hoped that other financial assets became attractive, so that the demand for gold was less. Gold import bill is likely to touch $58 billion in 2011-12 from $33 billion in 2010-11.
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