New Delhi, Sept. 13: The Prime Minister’s Economic Advisory Council has forecast GDP growth at a better-than-expected 5.3 per cent this fiscal and predicted that inflation would cool to 5.5 per cent by March.
But the council believes that the UPA government will struggle to come to grips with the twin deficits that have been flagged as a big worry by the central bank, independent economists and foreign investors.
The council said containing fiscal deficit within the budgeted estimate (4.8 per cent of GDP) could be a challenge and went on to add that the government may have to take $8.6 billion out of its foreign exchange reserves to plug the current account deficit even if it was able to trim it to $70 billion from $88.2 billion last year.
The reason: portfolio investments by foreign investors are expected to tumble 90 per cent to a piffling $2.7 billion from $26.9 billion last year.
If true, it will be only the third time since the global economic crisis erupted in September 2008 that the government will have dipped into its forex reserves to paper over the current account deficit, which is the difference between the value of goods and services that the country imports and exports and all its financial transfers.
PMEAC chairman C. Rangarajan said the RBI must continue with its tight monetary policy until the battered rupee stabilised.
“Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authorities can switch to a policy of easing,” Rangarajan said while releasing the council’s Economic Outlook for 2013-14.
The council expects growth to get a boost from a good monsoon. “The monsoon and Kharif (monsoon) planting has been very good… with good rains filling reservoirs, the Rabi (winter) crop, too, should be good,” he said.
In the council’s forecast, industry has been projected to grow at 2.7 per cent in 2013-14 against 2.1 per cent last year, with manufacturing expected to grow 1.5 per cent in 2013-14 against 1 per cent last year.
Industry had shown signs of contraction in the first half of this year but recovered on the back of strong electricity and capital goods production in July.
Services are expected to grow at 6.6 per cent in 2013-14 against 7.1 per cent in 2012-13. Rangarajan said, “The economy will also perform better in the second half of 2013-14 for three reasons — the full impact of various measures taken over the last six months will be reflected then; strong emphasis being laid on improving key infrastructure sectors such as coal, power, roads and railways and continuous efforts to de-bottleneck projects will show.”
The country’s trade deficit narrowed in August as exports grew 13 per cent in the month from a year ago, while imports fell 0.7 per cent, the commerce ministry said earlier this week.
Helping the current account deficit is a recent trend of lower gold import on the back of higher taxes and restrictions imposed by the RBI.
“We do expect gold import to come down substantially during this year... with the present regulations... gold imports may come down to $38 billion.”
The panel also expects more NRI fund inflows into Indian banks, pushing inflows to $17 billion, which is $3 billion more than last year. FDI inflows are expected to be the same as last year at $27.6 billion.
The rupee, which had sunk to an all-time low of 68.85 per dollar on August 28, is believed to have reached a stable value.
“The rupee at the current level is well corrected. Stability is returning to the foreign exchange market. As capital flows return and as CAD begins to fall, this tendency will strengthen,” Rangarajan said.
The rupee today recovered all of its early losses and edged up two paise to end at 63.48 against the dollar