Ahead of the Reserve Bank?s first quarter review of the monetary policy on Tuesday, the Prime Minister?s Economic Advisory Council (PMEAC) has pitched for an increase in the pace of monetary tightening to tackle the demand-side pressures on inflation. It relied on policy tightening by the central bank, coupled with a monsoon-fed good crop, to predict a cooling of headline inflation from 10.16%, as per latest reading to 6.5%, by March 2011.
The council pegged growth this fiscal at 8.5%, higher than the February estimate of 8.2%, on the back of an apparently good monsoon and a revival in exports. With private investment back on track, the investment rate this fiscal is expected to be 37% and 38.4% next fiscal.
While the council?s growth projection is in line with finance ministry?s expectation, it is lower than the 9.4% growth predicted by IMF.
In its economic outlook released here on Friday, the council also called for a rationalisation of food and fertiliser subsidies to complement the subsidy reform that began with the recent deregulation of fuel prices.
Addressing a press conference, PMEAC chairman C Rangarajan, however, said ?bringing the food subsidy down would not be an easy task, especially at a time when the government is gearing up to introduce the proposed Food Subsidy Bill.? The Rs 1-lakh-crore-plus subsidy burden on fertiliser and food exerts a huge pressure on the government finances.
The PMEAC also stressed on the need to have a policy to broadbase the country?s fuel usage to reduce the proportion of coal in the fuel mix.
Stating that taming of inflation was necessary to ensure sustainable economic growth prospects of the country, the former central bank governor said improving farm productivity and focus on developing physical infrastructure would ensure a sustainable 9% growth rate in Asia?s third largest economy after China and Japan.
The council dismissed concerns about financing the current account deficit as foreign capital inflows were expected to remain strong. ?Foreign capital inflows will remain high in the next financial year also as the high growth in the country will make it an attractive investment destination in a global economy that is still not out of the woods,? it said.
The PMEAC suggested continuation of fiscal stimulus measures like low indirect taxes in the current year and supported implementation of the goods and services tax (GST) regime by the next financial year.
?I think that tax rates under the GST are arrived at after detailed discussions between states and the Centre, and we are not expecting any problems with implementing it from next financial year onwards,? said Rangarajan.
According to the council, savings and investment rates are coming back to a level that will enable the economy to expand annually at a sustainable 9%. The savings and investment rate are expected to improve further in the next financial year.
Factoring in better-than expected inflows from the auction of 3G airwaves and broadband spectrum, and the government?s decision to partially deregulate petroleum prices, which will lower the subsidy burden, the council pegged current year?s fiscal deficit within the 5.5% projected by the Union Budget. However, sounding a note of caution, the council said, ?The relatively easy options available in the current year like the telecom revenues and disinvestment proceeds will not be available in coming years and serious policy measures to contain unproductive expenditures will have to be initiated.?