Indian economy to grow 8.7% in 2011, says Escap

Written by Sharad Raghavan | New Delhi | Updated: May 6 2011, 08:39am hrs
The Indian economy will grow 8.7% in 2011, just short of the 9% predicted by Pranab Mukherjee in his Budget speech, according to the Economic and Social Survey of Asia and the Pacific by Escap.

However, Mukherjee on Thursday revised his estimate to 8% to take into account the battle against rising inflation, which the report agrees is a major hindrance to growth.

The report says that Indias growth will be powered by robust consumption and investment, although inflation is likely to slow it down. Consumer price inflation in India is likely to be at a high 7.4% in 2011, according to the report, easing from 11% in 2010.

The report lays the blame of such high rates of inflation on external supply-led increases in food and energy prices, such as the effect of the unrest in West Asia, the crisis in Japan and speculation on commodity prices.

The report outlines the scenario for India and other Asian countries in the event of a rise in oil prices. A $10 increase in oil prices will slow output growth in India by 0.23% and raise inflation by 0.52%.

A $25 increase in oil prices will restrict growth further, by 0.64%, and increase inflation by almost 1.5%.

But more than headline inflation, what worries the government is food inflation. The report outlined some steps that the government can take to tackle the rise in food prices.

First, it says, the government needs to regulate speculative activity, which drives commodity prices, including those of food items, up. Second, the report recommends the setting up of buffer stocks of foodgrains to be used to moderate price volatility.

Third, and critical in Indias case, it says the public distribution system needs to be strengthened.

Clearly, it is the distribution aspect that needs to be tackled urgently, given that the countrys reserves of foodgrains at present are well above the stipulated norms. Last year, there were several media reports on the rotting grain in government warehouses, and how they were not reaching their intended target, the poor.