India to grow at 7.2 percent: PM's council

New Delhi: Advocating caution while withdrawing fiscal stimuli, the Prime Minister's Economic Advisory Council on Friday pegged India's growth for this fiscal at 7.2 percent, accelerating to 8.2 percent and 9 percent, respectively, in the next two years.

In its review of the Indian economy presented to Prime Minister Manmohan Singh, just a week ahead of the national budget for next fiscal, the council said while high fiscal deficit was untenable and demanded immediate correction, the funds for infrastructure must not be curtailed.

Otherwise, the 43-page report was optimistic on the performance of the Indian economy, particularly drawing comfort from a better-than-expected rebound of industrial output, even as high inflation on account of food prices remained a major concern.

"The council expects a bounce back in agricultural gross domestic product in the next year and maintenance of the desired trend growth of 4 percent in 2011-12," council chairman C Rangarajan said at a press conference here to unveil the review.

The council also expected the industrial and service sectors to continue to register strong growth through both these years and hoped the government's priorities and initiatives on infrastructure would proceed along desired lines.

"On this basis, we are making an initial estimate that the economy would grow by 8.2 percent in 2010-11 and by 9 percent in 2011-12," said Rangarajan, after presenting the review to the government.

The council also noted with concern the price movements in the current fiscal that has resulted in very high rates of inflation in food products, both primary articles and manufactured items.

"The critical component of the inflationary process in the current fiscal derives from primary food and sugar. Within primary food, goods that have exhibited the highest rate of inflation are foodgrain -- pulses, wheat, rice, in that order, and sugar in the manufactured category."

The council also took note of the upward revision in the annual inflation rate outlook of the Reserve Bank of India (RBI) to 8.5 percent for this fiscal -- almost all of this on account of higher prices for food items, both primary and manufactured.

"The danger of this spreading to other commodities certainly exists, especially in the backdrop of the strong recovery that the Indian economy has been making since the summer of 2009," it said.

"Policy must remain alive to the danger that a significant transfer of food price inflation to the general price level might occur in 2010-11."

On the issue of exit from the multi-billion dollar stimuli packages announced by the government since December 2008 to help the Indian economy tide over the global financial crisis, the council advised caution.

"While it is important to reduce the fiscal deficit significantly in the coming budget, it is important to safeguard capital expenditures, particularly in the infrastructure sectors," it said.

"Infrastructure spending is critical and even if the private sector investment in infrastructure is sought, government will have to provide adequate viability gap funding," the council said.

"Thus, there is no scope for compressing capital expenditures while undertaking fiscal correction."

Industry chambers agreed with the view even as they shared the council's concern on high fiscal deficit, falling investments in development and infrastructure projects, rising food prices and low farm productivity.

"With global economy yet to recover, which poses significant down side risks to growth, there is a need to continue with the stimulus measures for some more time," said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII).

"The growth in next fiscal could well exceed 8 percent if fiscal concessions go on and the government takes measured and calibrated steps for fiscal consolidation with no dithering on divestment," said the Associated Chambers of Commerce and Industry (Assocham).