Government lowers GDP outlook to below 7 per cent

The government's financial projections seem to be coming in closer touch with economic reality. As more data about the just-concluded fiscal year 2008-09 flows in, the prime minister's economic advisory council has lowered India's GDP growth forecast to 6.5-7 per cent against its earlier outlook of 7.1 per cent.

Suresh Tendulkar, chairman of the PMEAC, said on Sunday that the lowering of the growth rate was because the "contraction in trade turned out to be much greater than it was anticipated".

Tendulkar pointed out the obvious facts that the global crisis affected the Indian economy through export-related industries and capital outflows; and that foreign institutional investors' obligations back home impacted domestic industries capital requirement.

"There was deeper than expected recession in advanced countries. The psychology of gloom and doom which has essentially pervaded in the industrialised countries was imported to this country," Tendulkar added.

In January, the council had revised its growth projection to 7.1 per cent from 7.7 per cent projected initially. It had then said the adjustment had to be made due to abrupt changes in the international economy.

Meanwhile, Reserve Bank of India governor D Subbarao said the central bank's main policy objective would be to arrest the moderation in economic growth and restore eroded market confidence.

The moderation in the country's growth has been steeper than expected, Subbarao admitted, adding that banks are yet to respond to the policy actions as to the extent required.

 But he added that the fundamentals remained strong and would help India to recover from the global financial crisis fast. ''Once the world economy regains growth, India's recovery will be much faster than the rest of the world,'' Subbarao said at a trade meeting in New Delhi this morning.

'No cause for worry'
Another government economist, chief economic advisor in the department of economic affairs Arvind Virmani, said the rising fiscal deficit following the stimulus packages provided by the government is not a cause for worry.

''Widening fiscal deficits will provide consumption stimulus,'' Virmani said at a Kotak Institutional Equities conference call with investors last week.
With the government providing three stimulus packages to boost the economy, the fiscal deficit during 2008-09 is estimated to have shot up by 6 per cent of the GDP from the original estimate of 2.5 per cent.

For the current fiscal 2009-10, the government is estimating a deficit of 5.5 per cent, which is likely to be revised once the final budget is presented in July by the new government after the ensuing general elections.

Higher fiscal deficit during 2008-09 could be attributed to several factors, including the decision of the government to provide a stimulus to industry by raising public expenditure and lowering taxes. Virmani said most of these, including the farm loan waiver and pay commission-mandated salary increase for government employees, were a ''one-time affair to boost spending in 2008-09 and 2009-10, but would have no expenditure burden on 2010-11''.

On high government borrowing crowding out private funding needs, Virmani said it was for the Reserve Bank to choose the instrument for borrowing. However, he added that ''there is a need for unconventional thinking and a change in mindset''.

As regards the fiscal responsibility and budget management Act (FRBM) targets, he said it was not possible for the government to meet them in 2009-10. This was a natural outcome of the need to give fiscal stimulus, which was a conscious policy choice, he added.