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Tuesday, July 22, 2014  

India GDP likely to grow 6% in 2013, says Basu
NEW DELHI India’s economy is likely to grow at slower than 6 per cent this year, World Bank chief economist Kaushik Basu said on Friday, dashing hopes of a revival in the coming months.

The World Bank is expected to announce its global growth projections on 15 January.

Basu, a former chief economic adviser to the Indian government, said the projections indicate that a bounce-back in the Indian economy is unlikely, adding that the euro zone crisis was likely to persist till 2015.

On India’s current account deficit, which widened to 5.4 per cent of GDP in the July-September quarter, Basu said that though it is a cause of worry, there are market factors which will come into play to stabilise it. “India has proper floating exchange rate, it (CAD) is not as worrying because there are automatic market stabiliser which will begin to kick in,” he said.

“There will be two difficult years ahead for Europe,” Basu said while delivering the CD Deshmukh lecture in the national capital, organised by the National Council of Applied Economic Research.

“The euro zone, which was headed into a crisis at the end of 2011, averted the major crisis by methods of injecting liquidity. But this $1.3 trillion (around Rs71 trillion today) injected will have to be repaid at the end of 2014 and the beginning of 2015.”

India’s chief economic adviser, Raghuram Rajan, in December estimated that the country’s economy would grow at 5.7-5.9 per cent in the fiscal year that ends in March, against the 7.6 per cent growth forecast in the budget for 2012-13.

The government had based its projection on the expectation that the economy had bottomed out and growth in the second half of the fiscal year was likely to be around 6 per cent. But India’s economic growth slowed to 5.3 per cent in the September quarter from 5.5 per cent in the first quarter.

Given that manufacturing is yet to show signs of a revival and only marginal agricultural growth is foreseen, chances of India’s economy expanding at faster than 6 per cent in 2013-14 are narrow, analysts say.

India should be able to achieve a growth rate of 8 per cent if it manages to maintain a savings rate of 35-37 per cent of gross domestic product (GDP), said Rakesh Mohan,
executive director, International Monetary
Fund. “If we want to have an impact on the people’s welfare in the grassroots level, you need to have these kind of growth rates (8 per cent). With incremental capital output ratio of 4-4.5 per cent and an investment rate of more than 35 per cent, achieving a sustained growth rate of 8 per cent-plus is not difficult,” Mohan said.

On Basu’s contention that India’s rising current account deficit—it touched a record high of 5.4 per cent of GDP in the fiscal second quarter—could be managed due to a floating exchange rate, Mohan was sceptical.

“We have sustained inflows of remittances, which account for 3.5 per cent of GDP. Inflows on account of IT (information technology), BPO (business process outsourcing) and other exports account for another 3.5 per cent of GDP. So, in effect, we are talking about a merchandise trade deficit of 12.4 per cent. Is the exchange rate mitigating this? The answer is no,” Mohan argued.

Basu also said India’s sticky inflation was a matter of concern. “Inflation has persisted between 7-11 per cent for a little more than three years now. That’s a longish period and in a country with as much vulnerability as ours, you have to be concerned about this,” he said. The government should try to bring inflation down to 4-5 per cent, he said.

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