Highlights of Economic Outlook 2011-12

The Chairman Economic Advisory Council to the Prime Minister, Dr. C. Rangarajan released the ‘Economic Outlook 2011-12’ in New Delhi today. Following are the highlights:

Economy to grow at 8.2% in 2011-12

Agriculture grew at 6.6% in 2010-11. Projected to grow at 3.0% in 2011-12

Industry grew at 7.9% in 2010-11. Projected to grow at 7.1% in 2011-12

Services grew at 9.4% in 2009-10. Projected to grow at 10.0% in 2011-12

The projected growth rate of 8.2%, though lower than the previous year, must be treated as high and respectable, given the current world situation.

Global economic and financial situation unlikely to improve

To keep the economy growing at 9% it is important to increase fixed investment rate

Investment rate projected at 36.4% in 2010-11 and 36.7% in 2011-12

Domestic savings rate as ratio of GDP projected at 33.8% in 2010-11 & 34.0% in 2011-12

 The 2011 monsoon projected to be in the range of 90 to 96 per cent of Long Period Average. As a result farm sector output expected to grow at 3 %

The revised series (2004/05) for Index of Industrial Production shows an output growth pattern that is fairly different from what the old series (1993/94) had indicated.

The output growth was grossly underestimated by the old series in 2007-08 and overestimated in 2008-09 and 2009-10.

The impact of the global crisis on industrial output was much stronger than had been indicated by the old series

In 2010-11 the output growth was higher at 8.2% against 7.8% indicated by the old series

Current Account deficit is $44.3 billion (2.6% of GDP) in 2010-11 and projected at $54.0 billion (2.7% of GDP) in 2011-12

Merchandise trade deficit is $ 130.5 billion or 7.59% of the GDP in 2010-11 and projected at $154.0 billion or 7.7% of GDP in 2011-12

Invisibles trade surplus is $ 86.2 billion or 5.0% of the GDP in 2010-11 and projected at $100.0 billion or 5.0% in 2011-12

Capital flows at $61.9 billion in 2010-11 and projected at $72.0 billion in 2011-12

FDI inflows projected at $35 billion in 2011/12 against the level of $23.4 billion in 2010-11

FII inflows projected to be $14 billion which is less than half that of the last year i.e $30.3 billion

Accretion to reserves was $15.2 billion in 2010-11. Projected at $18.0 billion in 2011-12

Inflation rate projected at 6.5 % in March 2012.

The headline inflation rate would continue to be at 9 per cent in the month of July-October 2011. There will be some relief starting from November and will decline to 6.5% in March 2012.

Available food stocks to be liberally released

Important role for fiscal policy to contain demand pressure. Need to ensure that fiscal deficit does not exceed the budgeted level

RBI will have to continue to follow a tight monetary policy till inflation shows definite signs of decline

Achieving fiscal targets set in 2011/12 budget estimates to present a significant challenge

For 2011/12, budget estimates of fiscal deficit for Centre - 4.7%; States- 2.1% and consolidated fiscal deficit including off budget liabilities - 6.8%

Government to redouble efforts to collect larger revenue, resolve cases to reduce tax arrears

Minimize avoidable expenditures and initiate measures to increase revenues

Resolve issues with states and introduce Goods and Services Tax

Reforms in power sector distribution system to limit the liabilities of state governments

Some key issues of concern:

Convergence of growth rates of states

An analysis of the recent data indicates that while most of the lower income states have shown stronger growth rates, several of the higher income states have also shown an increase

Current Account Deficit

Given our growth needs, a moderate trade deficit and CAD are inevitable. To finance the CAD, foreign investment flows need to be promoted. However CAD to be contained below 2.5% of the GDP

Power Sector

The India growth story inextricably linked to the power sector

Immediate policy interventions required for ensuring coal availability for the power plants, land acquisition and environmental clearances and revision of power tariff by states to reduce high AT&C losses

Increased focus on non conventional energy

Food Security

Need to grant the poor a legal entitlement to food through an appropriate legislative enactment

Availability of grain to be kept in mind while deciding legal entitlements

Reforms in PDS important to strengthen distribution. Computerization, introduction of smart cards and using unique identification numbers for the beneficiaries are important interventions

Table 1: GDP Growth - Actual & Projected

At constant 2004/05 prices