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C. Rangarajan (right) in New Delhi on Friday. Picture by Prem Singh
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New Delhi, Aug. 17: The Prime Minister’s Economic Advisory Council (PMEAC) expects the economy to grow 6.7 per cent this year against 6.5 per cent in 2011-12.
The panel has recommended an increase in the price of diesel in one or more steps and a cap on the consumption of subsidised cooking gas cylinders, besides opening up multi-brand retail.
“The economy will grow at 6.7 per cent in 2012-13,” PMEAC chairman C. Rangarajan said while releasing the outlook for 2012-13.
The advisory council’s projections are more optimistic than that of many analysts, including rating agency Moody’s, which said India was likely to grow by 5.5 per cent.
The council projected farming to grow at just 0.5 per cent in the current fiscal, industry at a modest 4.5 per cent and services at 8.9 per cent, lower than the double-digit figures recorded through most of the last decade.
Though manufacturing growth has been disappointing in the first few months, Rangarajan expected factory output to pick up in the second half of the fiscal as measures taken to boost production yield results.
The report also said inflation was likely to be higher than what the council had earlier forecast. While it had earlier said prices would rise 5-6 per cent, the report now placed annual inflation at 6.5-7 per cent.
“Food inflation is expected to remain high in the coming months because of scanty rains,” Rangarajan said.
The monsoon, despite picking up in recent weeks, was still deficient by 16 per cent and would have an adverse impact on prices, he added.
The economic outlook expects savings and investment to pick up in the near future. It also expected gross domestic fixed capital formation, a key indicator of investment, to increase to 30 per cent of GDP in 2012-13 from 29.5 per cent last year, and the savings rate to rise to 31.7 per cent of GDP from 30.4 per cent.
To encourage predictability in taxation, Rangarajan said efforts were needed to address investor concerns. He was referring to investor worries over the retrospective amendment to the income tax act and the General Anti-Avoidance Rules (GAAR).
Rangarajan said, “There is a need to address the apprehensions that have been occasioned by perceptions of arbitrary actions on tax and other fronts.”
In view of the objections raised by investors, the government had postponed the implementation of GAAR and set up an expert committee to look into the concerns of foreign investors.
The retrospective amendment to the income tax act sought to undo the decision of the Supreme Court in the Vodafone tax case.
Rangarajan also recommended a curb on the import of gold, improvement in regulatory regime to encourage investment in mutual funds and insurance, allowing FDI in multi-brand retail and a big push to infrastructure spending to accelerate economic growth.
“For channelising transfer of capital and technology, FDI in multi-brand retail up to 49 per cent may be allowed to attract investment in this sector,” Rangarajan said.
Making a case for reforms in the aviation sector, he said the government should consider allowing foreign airlines to pick up a 49 per cent stake in domestic airlines.
Rangarajan suggested “a suitable increase in the price of diesel in one or more steps, and a cap on the level of consumption of subsidised domestic LPG close to what is currently being consumed by poorer households (i.e. 4 cylinders)”.
The initiatives to check petroleum subsidy would help to contain fiscal deficit and deal with the rising problem of crude in the international market.
Expressing concern over the fiscal situation, Rangarajan made a strong case for the introduction of goods and services tax, curtailment of subsidies and special efforts to improve the tax-GDP ratio.
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