The Economic Advisory Council, the think-tank in the Prime Minister's Office has lowered the growth projection for the current fiscal to 7.7 per cent in its recently released Economic Outlook for 2008-09, relatively a sharp reduction in the base-line forecast of 8.5 per cent attempted in January 2008, as also the 5-year trend rate of around 8.8 per cent. Agriculture is expected to grow at 2 per cent, less than half the pace a year ago. Industry (7.5 per cent) and services (10.3 per cent) are also feared to show marked retard. The investment rate is likely to match 2007/08, although savings are projected to decline. Consequently, the overall savings rate will for the first time in recent years be significantly lower than the investment rate - necessitating absorption of foreign savings, i.e. current account deficit.
A number of factors inimical to growth have intensified in 2008 such as a sharp elevation in global inflation rates specially crude oil, tightening in credit and equity markets and global slowdown. Domestically, there is some danger on the food price inflation front. Inflation is expected to ease to 8 to 9 per cent by March. But this would be sans, badly required periodic adjustments of exorbitant oil prices.
Electricity generation is programmed to increase by 12 per cent, but the first quarter has seen only 2 per cent rise. Power generation and distribution would have to be stepped up so that they don't hamper growth. Residential and commercial construction has taken a hit following high interest cost and steel prices, which would slow construction to 8.5 per cent, the slowest pace in the last 5 years.
As usual, EAC report contains very good, comprehensive analysis of external sector. The CAD is likely to expand to $41.5 billion, equivalent to 3.2 per cent of GDP—deteriorating from 1.5 per cent of GDP in 2007-08. Total capital inflows of $70.9 billion, though 34 per cent less, will however be more than adequate to finance CAD, leaving about $29 billion to accrue in the foreign exchange reserves of RBI.
Government finance seems to be orderly, but there are serious fiscal risks arising from growing off-budget liabilities on account of fertiliser, food and oil, along with unbudgeted liabilities arising out of the farm loan waiver and NREGA schemes and the implementation of the 6th Central Pay Commission. These liabilities could amount to 5 per cent of the GDP in 2008-09, which is twice of budgeted deficit of 2.5 per cent.
EAC is mandated to apprise the PM of important developments at home and abroad and suggest suitable policy response. This makes its appraisal stand out from other official reviews in respect of objective and frank, in-depth analysis and assessment.