Double-digit growth requires more reforms

Updated: Feb 29 2008, 05:47am hrs
Sustaining 9% growth rate will be a challenge for India because of inflationary pressures and infrastructure constraints. Pushing it beyond that will be even more difficult, the Economic Survey said. Besides, deceleration in the agriculture sector and troubles in the US economy may compound the problem.

The survey tabled in Parliament by finance minister P Chidambaram on Thursday said that raising growth to double-digit would require additional reforms, and prescribed a variety of policy options to achieve it.

The survey, however, said inflation was likely to remain moderate in the coming months and capital inflows, which have pushed the rupee up, should ease in 2008.

The economy is projected to grow at 8.7% in 2007-08, lower than 9.6% and 9.4% achieved in the previous two years. The growth is mainly driven by investment and supported by high consumption levels. India's investment and savings rate, as a proportion of GDP, stood at impressive 35.9% and 34.8%, respectively.

Per capita private final consumption expenditure has increased in line with per capita income. The growth rate has almost doubled to 5.1% per year from 2003-04 to 2007-08, with the current years growth expected to be 5.3%.

Chidambaram said despite constraints he was confident of achieving an average of 9% growth up to 2012 and keeping a grip on inflation. The growth rate has averaged 8.7% per annum during these five years. This indicates stability and sustainability, he said.

But he added that India has to be cautiously optimistic and responsive to global developments. If you wish me to sum up in one phrase the outlook for next financial year, I would say 'optimism,' but with caution as the watchword.

The growth has decelerated this year due to moderation in most of the sectors except electricity, community services and services like trade, hotels, transport and communication.

Manufacturing sector, which makes up for nearly 15% of the GDP, is expected grow at a 9.4% this fiscal in comparison to 12% in the previous year. Mining and quarrying sector is estimated to grow at 3.4% as compared to 5.7% in the previous financial year.

High interest rates have increased the cost of production and reduced consumer goods demand. The slower growth of consumer durables was the most important factor in the slowdown of manufacturing, the Survey said.

Services sector, which accounts for more than half of national income, was expected to grow 10.7% in 2007/08, lower than the 11.1% growth rate in the previous fiscal.

Agriculture sector, which generates a fifth of GDP but employs about 60% of the countrys population, was estimated to expand 2.6%, down from 3.8% in the previous fiscal. The deceleration of growth of agriculture sector is attributed to the slackening growth of the Rabi crop.

Among the booming services sector, trade, hotels, transport and communication activities are likely to expand by 12.1% from 11.8%. However, finance, real estate and business services are estimated to grow at 11.7% as against 13.9%.

Construction activities are projected to moderate to 9.6% as against 12%. Electricity, gas and water supply would be the only saving grace in the industrial activities as they are shown to be growing at 7.8% against 6%.

The Survey stated that slowdown in the US market would impact India but it was difficult to quantify its impact. It expected that one of the implications of the sub-prime crises would be increase in capital inflows.

Thus the situation of excess inflows is likely to remain, though the pressure on reserve accumulation and exchange rate appreciation is likely to ease.