Mid year Review-2009

Economy poised to hit high growth path, says mid-year review

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Higher inflation, due to food price increase, may continue

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The Indian economy is well on course to return to high growth trajectory. But this broad-based recovery is likely to be accompanied by somewhat higher inflation, mainly on account of food price rise, the Government's Mid-Year Review 2009-10 has said.

The gross domestic product (GDP) is likely to be in the upper bound of the 6.25-7.75 per cent range predicted by the Economic Survey 2008- 09 in July this year - or may even exceed it, said the review tabled in the Lok Sabha

This forecast of near 7.8 per cent GDP growth or even higher than that for 2009-10 is perhaps the highest by any agency and was much higher than the 6 per cent (with upward bias) growth projection made by the Reserve Bank of India.

The robust outlook for economic growth in 2009-10 comes on the heels of the 7.9 per cent GDP growth recorded in Q2. India's GDP grew 6.7 per cent in 2008-09 and 6.1 per cent in the first quarter this fiscal.

Stating that inflation worry must not be dismissed, the review has, however, noted that there are some technical reasons why inflation appears somewhat larger than it is.

The decline in the base (price indices in November and December last year declined) is giving boost to the current inflation figures.

This, coupled with the rise in price index, which is indeed taking place, makes the inflation appear somewhat larger than it is

Describing it as an "unusual inflation" in which the price rise across commodities is highly skewed, the midyear review has noted that this inflation was not a product of aggregate demand expansion in the economy.

"Its dominant cause is the supply-side one of reduced food production or more accurately, the expectation of a reduction in food production over the next months that the drought and poor monsoon in India have inevitably given rise to," the review said.

Capital Flow

With the return of capital flows, the mid-year review has raised the question of economy having to once again contend with the challenge of maintaining balance between price stability, exchange rate and capital mobility.

However, it noted that the problem of capital flows is somewhat muted this time round since the levels of inflows could be managed without significant costs or tradeoffs in policy setting.

"This (capital inflows) is, however, a matter that will need some deep strategic thinking in the long run", the report said.

It has also highlighted that foreign funds are required to meet the long-term finance requirements in critical infrastructure sectors.

Also, the utilisation of foreign funds in productive sectors can also avert the risk of creation of asset price bubbles.

The review also said that there was enough evidence to suggest that the fiscal policy measures undertaken by the Government had worked.