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PM's economic panel lowers growth estimate to 6.7% for 2012-13

Prime Minister's Economic Advisory Council (PMEAC) pegged economic growth rate for current fiscal at 6.7 percent, less than an earlier estimate of 7.5-8 percent.

New Delhi: Prime Minister's economic advisory panel on Friday pegged GDP growth for the current financial year at 6.7 percent, painting a better picture of the economy than by other think-tanks.

It, however, added that inflation would remain high during the fiscal at 6.5-7 percent, mainly due to poor monsoon which will pull down the agriculture growth rate to 0.5 percent from 2.8 percent last year.

"Economy will grow at 6.7 percent in 2012-13," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said while releasing 'The Economic Outlook for 2012-13'. He earlier presented the report to Prime Minister Manmohan Singh.

Making a strong case for reforms, Rangarajan asked the government to open multi-brand retail to foreign investment and raise diesel prices in one or more steps to contain the subsidy Bill.

He also recommended a curb on import of gold and improvement in regulatory regime to encourage investment in mutual funds and insurance.

Reserve Bank of India (RBI) had earlier lowered its growth projection for 2012-13 to 6.5 percent from 7.3 percent estimated earlier.

The economic growth rate had plunged to nine-year low of 6.5 percent in 2011-12.

Rangarajan remained optimistic about the growth prospects in the current year despite other agencies like Crisil and Moody's projecting a growth rate of 5.5 percent on account of global problems and deficient monsoon.

The PMEAC chief suggested host of measures like allowing FDI in multi-brand retail and a big push to infrastructure spending to accelerate economic growth.

"For channelising transfer of capital and technology, FDI in multi-brand retail up to 49 percent may be allowed to attract investment in this sector....", Rangarajan said.

Making a case for reforms in aviation sector, he said, the government should consider allowing foreign airlines to pick up 49 percent FDI in domestic airlines.

In order to encourage investment in infrastructure sector, he said the government should recast Cabinet Committee on Infrastructure as the Cabinet Committee for Sustainable Development of Infrastructure and make special efforts to clear high-impact infrastructure projects costing over Rs 5,000 crore.

Referring to oil sector, Rangarajan suggested "a suitable increase in the price of diesel in one or more steps, and a cap on the level of consumption of subsidised domestic LPG close to what is currently being consumed by poorer households (i.E. 4 cylinders)".

These measures, he added, would help in containing petroleum subsidy and dealing with the rising problem of crude in the international market.

Referring to the price situation, Rangarajan said, the government needed to improve marketing and storage facilities to deal with supply-side problems.

Referring to issues concerning policy predictability, Rangarajan underlined the need for addressing apprehensions with regard to taxation issues.

"There is a need to specifically focus and address the apprehensions that have been occasioned by perceptions of arbitrary actions on tax and other fronts," he added.
Several issues have come up because of the budgetary proposal to amend Income Tax Act with retrospective effect and introduce General Anti Avoidance Rules (GAAR).

In view of concerns expressed by investors, government had postponed the implementation of GAAR. Prime Minister Manmohan Singh had earlier set up an expert committee to take care of the concerns of foreign investors.

Finance Minister P Chidambaram in his statement on August 6 had said, "Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, fair mechanism for dispute resolution and independent judiciary will provide a great assurance to investors. We will take corrective measures wherever necessary."

The retrospective amendment to Income Tax Act sought to undo the decision of the Supreme Court in the Vodafone tax case.

In order to accelerate the economy, Rangarajan suggested fast track clearance of outstanding payments towards infrastructure projects and special efforts to promote savings and investments.

As regards the agriculture sector, Rangarajan made a case for focussed attention on liberalising tenancy arrangements, reforming domestic markets for agricultural produce and, reducing input subsidies.

On prospects of agriculture sector growth, Rangarajan said it would moderate to 0.5 per cent in the current fiscal due to the impact of weak monsoon on agriculture and the current reservoir storage position.

Deficient monsoon, Rangarajan added, was likely to have an adverse impact on prices of primary food items, especially on those where the ability of government stocks to play a moderating role was not there.

The PMEAC pegged the inflation within the range of 6.5 to 7.0 percent at the end of 2012-13.

As regards the manufacturing sector, the Council has projected to grow 4.5 percent.

"Electricity, automotive, steel and cement sector have shown improvement in the period of April-June. Because of the benefits of the low base, manufacturing sector will show improved performance in the second half of this year," he said.

Mining sector for the year as a whole is expected to grow at 4.4 per cent on account of expansion in the coal and lignite sector, and some recovery in iron ore. Electricity generation expected to continue to grow at an average pace of around 8 percent, the report said.

Construction expected to show some improvement compared to last year as evidenced by the recent increase in the output of steel and cement. Also in services sector, the report said, "some improvement expected particularly in the large transport, trade and communications sector."

Referring to the current global situation, Rangarajan cautioned that "there is a dark mood in the advanced economies, especially in Europe. The slower growth in the US and in the EU will have an adverse impact on expansion of these markets for India's exports, both of goods and services."

Expressing concerns over fiscal situation, Rangarajan made a strong case for introduction of Goods and Services Tax (GST), curtailment of subsidies and special efforts to improve tax-GDP ratio.

The containment of the fiscal imbalance, he said, "rests on our management of the subsidy bill, especially that on refined petroleum products and by increasing the Tax-GDP ratio."

He further said that introduction of the GST would be a "very important milestone in the path of tax reform. It requires considerable negotiations, bargaining and preparatory work in relation to both the structure and operation of the tax."

He further said in contrast to the Centre's finances, the fiscal health of the states was better.

On the domestic savings rate, which declined from 32 per cent in 2010-11 to 30.4 per cent 2011-12, the PMEAC hoped that it would improve to 31.7 per cent in the current fiscal.

As regards the external sector, Rangarajan has projected some improvement in the Current Account Deficit in the 2012-13.

The report said that current account deficit (CAD), which was USD 78.2 billion (4.2 per cent of GDP) in 2011-12, is likely to be at USD 67.1 billion (3.6 per cent) in the current fiscal. The country's foreign exchange reserves are expected to improve by USD 4 billion during 2012-13.


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