Financial Daily from THE HINDU group of publications
Wednesday, Jun 08, 2005
Industry & Economy - Economy
PM cautioned on lower growth, slow-down in economy
New Delhi , June 7
The Prime Minister, Dr Manmohan Singh, has been cautioned that the economy is slowing down and could see a low growth rate of 6.7 per cent this year unless the Government intervenes with some policy initiatives.
The caution has come from the Prime Minister's Economic Advisory Council in the monthly report that it presents to Dr Singh. The report suggests that the forecast of 6.7 per cent growth for the current year, which incidentally is one of the lowest forecast by any economic think-tank this year, was based on a 1.8 per cent growth in agriculture and allied services and a seven per cent growth rate for manufacturing.
Explaining why it had assumed a seven per cent growth in manufacturing during 2005-06, the council said though manufacturing grew at 8.9 per cent in 2004-05 full year, it showed distinct signs of deceleration in the last quarter, especially in February and March. "This soft patch is likely to continue for some time at least. Also, export demand is likely to weaken in 2005-06. For these reasons, projected growth rate is only seven per cent for manufacturing in 2005-06,'' the report has said.
Contacted by Business Line, Mr Saumitra Chaudhuri, a member of the Economic Advisory Council, said though the growth projection for the current year was low, there was a possibility of a "policy bonus'' of 0.5 per cent if the Government intervened with some policy initiatives. Mr Chaudhuri, however, declined to go into the specific recommendations that the council may have made to the Prime Minister but added that interventions could aim at encouraging economic agents to invest, both in the corporate public and private sector.
"We are not talking of Government investment. What we are saying is that the private sector and the profitable public sector enterprises could be encouraged to invest more. Also, the Government could reinforce business confidence so that it generates and sustains higher levels of economic activity.''
If these expectations materialise, the council feels that industry could grow somewhat faster with manufacturing exceeding eight per cent and the services sector maintaining a high contribution. Besides, if natural conditions remain favourable, agriculture could also deliver a slightly higher rate of growth of about 2.2 per cent. In this alternative "improved scenario,'' it should be possible for the economy to generate a higher growth rate of 7.2 per cent, the report has said.
On the issue of petroleum products' pricing, the council has indicated to the Prime Minister that international crude oil prices were not expected to see any sizeable drop and that the Indian crude basket could continue to rule in the range of $45-50 a barrel. However, if the dollar gained significantly against the euro, the price range might drop marginally to a $43-$48 range.
In the council's assessment, though international crude prices could soften a bit more, any significant downward shift appeared unlikely for several reasons. For one, crude prices drop typically in summer from the high levels reached in the winter months, but this year, the downward trend has been weak. Second, the oil prices reflect not only the strength of the production cartel but also point to the speculative pressures of investors in commodity markets. Finally, future contract prices are normally lower than spot prices even in an upward price swing, but for several months now, future contract prices have been higher than spot prices, indicating that the markets do not expect a sizeable drop in spot prices.
The Prime Minister is understood to have taken note of the council's caution and his attempts to clear the policy hurdles restricting investment flows, including foreign direct investment, were indicative of the Government's intention to encourage more investments in the economy. Secondly, the renewed thrust on pushing ahead with the overall reforms agenda is said to be an attempt to boost business confidence.
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