The Economic Advisory Council’s (EAC) points out the structural weaknesses that the economy faces in sustaining the robust growth averaging 8.5 per cent over past five years, and these problems can have no quick fixes. There are imponderables and uncertainties ahead both globally and domestically with pre-election political compulsions, impinging on the already strained finances of the Central Government.
The constraints for growth include economic and social infrastructure, especially electricity, drinking water, irrigation and agricultural productivity. These areas need focused policy attention. But in electricity, long opened for private sector participation, one is yet to see a determined drive by the Centre and the States acting in concert to accelerate the execution of ongoing thermal power projects, with massive plan allocations, and get early results. Instead, there is greater emphasis on nuclear power becoming the solution for long-term energy security.
The annual rate of inflation was 12.44 per cent in the week ended August 2 as against 7.8 per cent at the end of March 2008. The Council does not see RBI target of 7 per cent by March next as feasible as it would require considerable effort and confluence of favorable factors, given the large backlog of fuel price adjustments. Containment of inflation is vital for ensuring macroeconomic stability and maintaining conditions conducive to high medium and long-term growth. It is also crucial for counter-balancing the adverse economic redistribution inherent in the inflationary process.
There can be a dramatic improvement in the overall outlook only if there is a sustained fall in global oil prices, in continuation of recent softening probably responding to firming of the dollar and some demand reduction in USA. Meanwhile, inflation in India is cutting into savings and domestic demand for durables. Recently global credit agencies have warned of risks to macro-economic stability with the double-digit inflation and build up of pressures on the fiscal system.
The impact of the Sixth Pay Commission recommendations had been factored in but the Cabinet decisions incorporate several improvements to the benefit of services, civil and military. The Finance Minister maintains that the central railway budget could bear the burden of the current year’s out go of Rs.15,700 crores and Rs.6400 crore respectively which EAC does not think so. It may turn out to be a major challenge to arrest the likely reversal o the process of fiscal consolidation along with restoring high growth with a reasonable degree of price stability.
On the external side, the Council projects trade deficit which has widen from last year to current year in spite of higher net invisibles including software and private remittances mainly. Net capital inflows would be less with sharp drop in portfolio flow and reduction in external borrowings and net additional reserves. In fact the reserves have been on downtrend so far in the current year from 315 billion dollars in March 2008 to 300 million dollars on August 1. EAC cautions that policy-maker may have to be prepared to face a situation of greater volatility in capital inflows on account of uncertain external environment.