labels: economy - general
Optimistic on FDI, trend stronger than expected: NCAER news
19 August 2006

The National Council of Applied Economic Research has upped GDP growth forecast for the year to nearly 8 per cent.

Suman Bery, director general, NCAER, says the raised GDP growth target is on higher industrial, services growth. He is optimistic on FDI, as he sees the trend stronger than expected.

Bery also believes that interest rate adjustment has more or less taken place.CNBC-TV18 shares with domain-b its interview with Bery:

What are the triggers for this higher growth rate? If one looked at your disaggregated numbers, you are expecting higher services and higher industrial growth. This, at a time when commodity prices and interest rates are not in favour of the industry? We do this forecast as a part of our subscriber product. The quarterly review of the economy and we issue the press release following that. The presentation that we made to our subscribers basically shows the economy as poised between fundamentals and sentiment.

We also did a ''business expectations'' survey and that showed that the sentiment was indeed weakening. So the obvious question is, in the light of weakening sentiment, rising interest rates and a dodgy oil market, why would there be an increase in the underlying growth?

The short answer to that is somewhat a more optimistic outlook on investment, particularly the FDI. We think that FDI trends are stronger than we thought they were going to be and we also feel that the interest rate adjustment has more or less taken place.

So that finally comes out with somewhat higher industrial and services growth rate. Also, the overall number by the Economic Advisory Councils forecast for the year ahead, that came out last week is the same as ours. Our agricultural growth is actually slightly stronger than what the EAC has projected.

The way interest rates have gone up now there is a distinct possibility that the trigger, which set the economy booming over the past few years, is perhaps going to weaken. So will there be a possibility that the kind of investment boom that we are seeing, could end up in some kind of hard landing in FY08? I think what has been important, impressive and healthy about the Indian growth story since the recovery began in 2002-2003 is that the sectors have rotated. It is certainly the case that the huge reduction in interest rates coupled with financial innovation, essentially the development of retail lending and of the mortgage market, has indeed stimulated a great deal of interest in the consumer durable sector and in the housing sector. But what our business expectations does reveal is that capacity is now being pinched. The India story is playing well overseas. So I am expecting that there will be a significant private investment recovery. And in India, as in China and as in most countries, private investment is driven much more by retained earnings, which have been strong and by FDI, which is getting stronger.

So my expectation is that from a recovery that is led by net exports, then move to the retail sector, we are now going to move over to an investment led recovery, both private and to some extent public as well. But the public is very much constrained by the fiscal and by the attempt to hit the Fiscal Responsibility and Budget Management, FRBM targets, which of course, is the subject of debate at the moment with the approach paper from the Planning Commission arguing that maybe some argument to oppose that.

So I think it is responsible for interest rates to rise because one of the charts that we presented yesterday, showed how much the gap between Indian short-term rates and the Fed fund rates has narrowed as the Fed has tightened.

This is unprecedented indeed, 8 per cent growth almost for three years running. Are we setting a base at 8 per cent or is this the top from where we can go down or maybe move upwards? I think all the elements are in place for this to be India''s take-off decade. What I mean by this is the decade, where you have a cycle, but that cycle is against a much higher base than before, and that higher base has typically been set by industrial growth in other countries in excess of 10 per cent a year for a series of years.

We saw this with Japan in the 1960s, Europe in 1960s, Korea in 1970s, the Asian tigers in 1980s, China in 1990s and one''s fervent hope is that in the units, it is India''s turn. But we cannot take it for granted. Reform is certainly necessary for this, but it is too early to say whether we are getting a strong cyclical recovery or whether we are actually breaking out into the sustained 8 per cent range, which is what the country is capable of, the country deserves.

I certainly think we have a reasonable basis for thinking that it could be sustained for the forthcoming five-year plan, and that is certainly the bet international players are making. I do expect that if one plays our cards right, the FDI will get even stronger and hopefully, industrial growth would get even stronger.

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Optimistic on FDI, trend stronger than expected: NCAER