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Strong rebound in the second half of FY10 drives Indian growth rate upwards: Review of the Economy-2009-10


Capital inflows of $48.5 billion in 2009/10 ($8.7 billion in 2008/09)
• Net accretion to reserves : $17.6 billion ( - $18.9 billion in 2008/09)

Surge in food inflation
• Primary food inflation 17.9% in January 2010, manufactured food products 26.4% in December 2009. CPI-IW 15% in December 2009.
• In the short run, government must ease supply by increased distribution from stocks and in the medium term by improving productivity.
• Energy index and manufacturing goods index (except food) did not rise much for most of 2009-10 but are now moving up.
• Danger of significant transfer of food price inflation to the general price level in 2010/11.
• Risk of rise in international commodity prices

Credit expansion pick up in second half and strong revival in mobilization from capital markets
• Recovery in economy necessitates a more neutral monetary policy.
• RBI action will depend on pick up in credit, liquidity conditions and further pressure on prices.
• Investment climate to see rapid recovery.

Need for fiscal correction
• Projected consolidated fiscal deficit: 10.3% in 2009/10 (10.4% in 2008/09).
• Debt-GDP ratio 76.6% in 2009/10 (70.6% in 2000-01)
• Large revenue and fiscal deficits of past two years unsustainable.
• Possible reduction of fiscal deficit of centre by 1.0-1.5% in 2010/11
• Feasible to reduce expenditure-GDP ratio by 1%
• Expand service tax coverage. Unify the rate structure of CENVAT and service tax and peg it between the current and the previous higher level.



Some Policy Options – management of prices, focus on agriculture and power
• To cool down food inflation
* Timely release of foodgrain in sufficient quantity below prevailing market prices
* Advance planning for timely imports at early signals of shortfall in production

• Two major constraints to growth in the medium and long term – agriculture and power
* Technology and organizational factors major constraints to sustainable
agricultural growth. Improve agricultural research by stepping up fund allocation,
revamping content and extension systems.
* Two constraints to capacity augmentation in power – shortage of domestic manufacturing capacity of power plant equipment and administrative issues like land acquisition and environmental clearances
* Important to scale up nuclear power generation


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