GDP may grow 8.2% next year:Eco Survey

India’s economic growth may accelerate to as much as 8.2 percent in the year starting April 1, providing room for a “gradual rollback” of fiscal stimulus, the finance ministry said before tomorrow’s budget.

“The economy has posted a remarkable recovery from the global recession,” according to the annual Economic Survey prepared by officials advising Finance Minister Pranab Mukherjee, which was released in New Delhi today. “The recovery creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last 15 to 18 months.”

Mukherjee may raise excise tax by 2 percentage points and the service tax to 12 percent from 10 percent, Goldman Sachs Group Inc. said last week. India and China, the world’s fastest growing major economies, are withdrawing stimulus as consumer demand strengthens, stoking inflation and asset bubble concerns.

India’s benchmark wholesale-price inflation accelerated to 8.6 percent in January, the fastest pace since October 2008. In China, where the economy grew 10.7 percent last quarter, property prices have surged 9.5 percent in January, the most in 21 months, as total new loans surged to 1.39 trillion yuan ($204 billion), more than in the previous quarter combined.

Sixty percent of India’s inflation reading is contributed by food items after monsoon rains were deficient last year, the ministry said. Since December 2009, there have been signs of food-price inflation spreading to manufactured goods and services, the ministry said.

“Inflation management therefore should involve controlling the demand situation as well as reining in inflationary expectations through various monetary measures,” the Indian finance ministry said.

Budget Deficit

Mukherjee is scheduled to unveil the budget for the fiscal year starting April 1 tomorrow at 11 a.m. in parliament in New Delhi. He had cut excise tax by 4 percentage points and stepped up government spending on roads and power since December 2008 to support the economy amid a global recession. The budget deficit may widen to 6.5 percent of GDP in the year ending March 31, a 16-year high, the ministry estimated today.

India’s central bank governor Duvvuri Subbarao last month said the government must withdraw fiscal stimulus steps and cut the budget deficit to help cool inflation. The central bank, on its part, last month raised the proportion of deposits that lenders need to maintain as cash reserves to 5.75 percent from 5 percent to contain inflation.

India must cut its debt to 68 percent of GDP by March 2015 from the current 82 percent, the ministry said, citing recommendations of the 13th Finance Commission, a government panel appointed to suggest a roadmap to reduce government debt.

Savings Rate

Mukherjee can start to reverse tax cuts as India’s $1.2 trillion economy may “breach” the 9 percent growth pace by March 2012, the finance ministry said, citing the country’s savings rates that now match those in Japan, South Korea and Malaysia. The economy may grow 7.2 percent in the year ending March 31, the nation’s statistics department said today.

India’s savings rate is at 32.5 percent of gross domestic product compared with 28 percent in Japan, 30 percent in South Korea and 38 percent in Malaysia, according to the report.

“Since these indicators are some of the strongest correlates of growth and do not fluctuate wildly, they speak well for India’s medium-term growth prospects,” the ministry said. “The savings rate is likely to rise further as the demographic dividend begins to pay off in India.”

The finance ministry estimates 440 million Indians out of a total population of 1.2 billion are under the age of 18. India’s population will rise to 1.7 billion by 2050 and will overtake China as the world’s most populous nation, according to the United Nations.

Rising Demand

“It is entirely possible for India to move into the rarified domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world within the next four years,” the finance ministry said.

Rising demand helped Tata Motors Ltd., India’s largest truckmaker, post a 68 percent gain in sales in the three months ended December, while sales at Bajaj Auto Ltd, the second- largest motorcycle maker, more than doubled in January.

Still, expansion in gross capital fixed formation, a proxy for investment growth, is at 5.2 percent, below the economic growth rate. That makes it necessary to watch the growth recovery in private investment in the fiscal third and fourth quarters while scaling back fiscal stimulus, the ministry said.

Eco Survey urges fiscal consolidation:
 
The Economic Survey for the fiscal 2010-11 today favoured providing further stimulus for the exports sector, arguing that the recovery prospects in global markets are still fragile.

It said that despite some improvement in global trade environment, the downside risks makes it imperative for the government to reform policies concerning imports as well.

"The downside risks for world and the Indian trade lie in the fact that though the fall has been arrested, both output and trade recoveries are still fragile given the fact that the recovery has been pumped up by the stimulus given by different countries, including India," the Survey said.

Amid the debate on withdrawal of the stimulus, including speculation of a possible across-the-board roll back of cuts in excise duty and service tax, the document suggested further reduction in excise for export oriented industries.

For the merchandise sector, some fundamental policy changes are needed "...these include further tariff reforms by lowering the peak duties (custom) from the present 10% to 7.5%, reductions of tariffs on all capital goods to a uniform 3% and further reduction in excise duties to make exports and industry competitive."

The government had cut excise duty from 14% to eight% and service tax from 12% to 10% in the wake of the global financial slowdown.

India's exports, after falling for 13 consecutive months since October 2008, turned positive from November 2009. But in April-December period, exports were down by 20.3%.
Following are the highlights of Economic Survey 2009-10:
* Economy likely to grow by up to 8.75% in 2010-11
* Full recovery; return to 9% growth in 2011-12
* Broad recovery gives scope for gradual stimulus roll back
* High double-digit food inflation in 2009-10 major concern
* Signs of food inflation spreading to other sectors
* Farm & allied sector production falls 0.2% in 2009-10
* Need serious policy initiatives for 4% agriculture growth
* Moots direct food subsidy via food coupons to households
* Favours making available food in open mkt
* Favours monthly ration coupons usable anywhere for poor
* Gross fiscal deficit pegged at 6.5 pc of GDP in 2009-10
* India 10th largest gold holding nation at 557.7 tonnes
* Exports in April-December 2009 down 20.3%
* Imports in April-December 2009 down 23.6%
* Trade gap narrowed to USD 76.24 bn in April-December.
* 32.5% savings & 34.9% investment (of GDP in 2008-09) put India in league of world's fastest growing nations.