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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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