Saturday, February 20, 2010

Review of the Economy - 2009-10


Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister released the document ‘Review of the Economy-2009-10’ at a Press Conference in New Delhi today.

Following are the highlights of the document:

. Strong rebound in the second half of 2009-10 drives growth rate upwards 
• Strong rebound in the third and fourth quarter especially industry
• Outcome in the farm sector much better than feared earlier in part due to proactive measures by government

Projected growth 7.2% in 2009/10, 8.2% in 2010/11 and 9.0% in 2011/12
In 2009/10:
• Agriculture : -0.2 % (1.6% in 2008/09)
• Industry (including construction) : 8.6% (3.9% in 2008/09)
• Services: 8.7 % (9.8% in 2008/09)
Growth may be even higher than 7.2%, driven by strong revival in manufacturing and construction
Developed countries have come out of recession but it is a weak recovery with downside risks to growth
• Financial markets nervous about fiscal sustainability – massive increase in risk aversion
• Worsening of budgetary positions in advanced economies
• Speculative pressure on commodity prices, especially the sharp rise in crude oil prices
Sharp fall in investment rate in 2008/09 reversed in 2009/10
• Estimated investment rate in 2009/10: 36.2% (34.9% in 2008/09). Will pick up with
improvement in domestic conditions.
• Estimated savings rate 34.0% in 2009/10 (32.5% in 2008/09) – will improve in the
subsequent years due to fiscal consolidation by government
Damage to Kharif output restricted, Rabi output to be higher than last year
• Wheat output will be almost equal and pulses slightly higher than last year
• Output of Kharif rice lower by 12 million tonnes but Rabi rice higher than last year.
Output of oilseeds, coarse cereals and sugarcane will be lower
• Government wheat and rice stocks to be comfortable
Strong recovery in manufacturing output will drive growth
• Recovery in manufacturing output from June 2009
• Q3 growth 14.3% (0.5% in 2008/09) , Q4 will be higher at 14.6% (0.3% in 2008/09)
Current Account Deficit : - 2.2 % of GDP in 2009/10 ( - 2.4 % in 2008/09)
• Export recovery slower than expected, projected at $168.7 billion in 2009/10
• Imports to show significant improvement in Q4. Projected at $296.8 billion in 2009/10
• Projected merchandise trade deficit for 2009/10:$ 128.1 billion or 9.8 % of GDP.
• Projected net invisibles: $98.6 billion. Strong growth in remittances and recovery in service
Capital inflows of $48.5 billion in 2009/10 ($8.7 billion in 2008/09)
• Net accretion to reserves : $17.6 billion ( - $18.9 billion in 2008/09)
Surge in food inflation
• Primary food inflation 17.9% in January 2010, manufactured food products 26.4% in
December 2009. CPI-IW 15% in December 2009.
• In the short run, government must ease supply by increased distribution from stocks
and in the medium term by improving productivity.
• Energy index and manufacturing goods index (except food) did not rise much for
most of 2009-10 but are now moving up.
• Danger of significant transfer of food price inflation to the general price level in
• Risk of rise in international commodity prices
Credit expansion pick up in second half and strong revival in mobilization from capital
• Recovery in economy necessitates a more neutral monetary policy.
• RBI action will depend on pick up in credit, liquidity conditions and further pressure on
• Investment climate to see rapid recovery.
Need for fiscal correction
• Projected consolidated fiscal deficit: 10.3% in 2009/10 (10.4% in 2008/09).
• Debt-GDP ratio 76.6% in 2009/10 (70.6% in 2000-01)
• Large revenue and fiscal deficits of past two years unsustainable.
• Possible reduction of fiscal deficit of centre by 1.0-1.5% in 2010/11
• Feasible to reduce expenditure-GDP ratio by 1%
• Expand service tax coverage. Unify the rate structure of CENVAT and service tax and
peg it between the current and the previous higher level.
Some Policy Options – management of prices, focus on agriculture and power
• To cool down food inflation
􀂾 Timely release of foodgrain in sufficient quantity below prevailing market prices
􀂾 Advance planning for timely imports at early signals of shortfall in production
􀂾 Develop a distribution channel to supplement the PDS
• Two major constraints to growth in the medium and long term – agriculture and
􀂾 Technology and organizational factors major constraints to sustainable
agricultural growth. Improve agricultural research by stepping up fund allocation,
revamping content and extension systems.
􀂾 Two constraints to capacity augmentation in power – shortage of domestic
manufacturing capacity of power plant equipment and administrative issues like
land acquisition and environmental clearances
􀂾 Important to scale up nuclear power generation

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