New Delhi: The Prime Minister's Economic Advisory Council (PMEAC) today said the economy would expand by a faster than expected 8.5% this fiscal, but cautioned that high inflation, low farm productivity and poor infrastructure could turn the story sour in the medium-term, reports PTI.
Describing inflation as a source of worry, the PMEAC today said containing surging prices, improving farm productivity and improving infrastructure is essential to put the country on a nine per cent growth on a sustainable basis.
Wholesale prices based inflation was 10.55% in June, owing to higher fuel and food prices.
Releasing the Economic Outlook for 2010-11, PMEAC chairman C Rangarajan said inflation at 10.55% is more than double the comfort zone and the Reserve Bank of India (RBI) should take either strong monetary action or "baby steps" to arrest it.
"A bias towards (monetary) tightening is necessary," the former RBI governor said.
The RBI is slated to review its monetary policy on 27th July.
Mr Rangarajan, however, said inflation would start easing by August-September and cool to 7%-8% by December before falling to 6.5% by this fiscal end. This fall, he said, would come on the back of better farm sector output.
He said the agriculture sector is likely to grow by 4.5%, industry 9.3% and services by 8.5% and these together would help push economic growth this fiscal to 8.5%. It had earlier projected 8.2% growth.
He said normal monsoon would help grow farm output, after two years of poor rains. Agriculture output grew 0.2% last fiscal and 1.6% the previous year.
However, overall low farm productivity could still come in the way of 9% growth projections in the long run, the PMEAC cautioned, while calling for improving water and soil management along with better farm practices and cultivation of a wider range of crops.
"We need to develop an integrated approach to these issues," Mr Rangarajan said.
The third area, which could halt the expected 9% growth story were infrastructure bottlenecks, particularly in power, the council said.
Ridiculing shortage of power supply, he said, "As against a planned target for creating 78,740 mega watts, it appears we would be lucky to get 62,000 MW by March, 2012."
But the 9% economic growth, the council felt, was possible thanks to high investment and savings rates of 38.4% and 36% that year.
Mr Rangarajan said the council has assumed recovery to be slow in the West, although it ruled out a second bout of recession like the one following the 2008 global financial crisis.
Pointing out that fuel has become a limitation in the power sector, Mr Rangarajan stressed on broad-basing fuel usage to nuclear power, natural gas and renewable sources, while reducing the proportion of coal.
The council expected manufacturing segment in particular and industrial sector in general to continue with high growth momentum.
"Overall, we expect manufacturing output to expand by about 10% in 2010-11 and the general index (industrial production) to register almost 10%. Capital goods output will register high growth, as will durable consumer goods," he said.
The PMEAC also expected services to continue to show buoyancy, though some segments in the community and personnel services will not be as strong.
It projected software and BPO activity to expand significantly in 2010-11, both in domestic and exports fronts.
Also, it forecast steady expansion in financial services.
Mr Rangarajan said capital flows will be sufficient to cover current account deficit estimated to be 2.7% of GDP this fiscal and add to the forex reserves.
Even as he expected portfolio investment, which is the foreign fund inflows in the capital markets, to decline to $25 billion this fiscal from $32 billion last fiscal, Mr Rangarajan said robust FDI inflow will more than make up for the decline.
Overall, capital inflows will add to $30.9 billion in forex reserves after meeting current account deficit this fiscal.
Mr Rangarajan said since the western world is showing only a modest economic recovery, India will be seen as an attractive destination for parking capital.
Steel Strips Wheels Ltd (SSWL) said it has started exports of spare wheel to BMW from its Chennai factory.
BMW had nominated SSWL to supply spare wheel for its model called MINI. MINI is currently being manufactured in Oxford plant and it is exported to about 70 countries worldwide. SSWL shall export 48,000 wheels annually for this particular model. BMW has also agreed to consider SSWL for their future models where they are using steel wheels, it said in a filing to Bombay Stock Exchange (BSE).
On Friday, SSWL shares ended 0.5% up at Rs212 on the BSE, while the Sensex closed 0.1% higher at 18,130 points.
Kolkata-based electric company CESC Ltd reported a net profit of Rs110 crore for the first quarter ended 30 June 2010 as compared to Rs105 crore for the same quarter last year.
Its total revenues increased to Rs1,111 crore for the quarter from Rs837 crore for the quarter ended 30 June 2009.
On Friday, CESC shares declined 1.2% to Rs398 on the Bombay Stock Exchange, while the Sensex closed 0.1% higher at 18,130 points.