NCEAR forecast pegs lower GDP growth at 7.9 pc

New Delhi, Aug 17: With Business Confidence Index (BCI) dropping by eight per cent in July this year, the National Council of Applied Economic Research (NCAER) today forecast a reduced level of GDP growth of 7.9 per cent in 2006-07, as compared to 8.4 per cent in the previous fiscal.

''Although several developments in the economy may have influenced the change in outlook, one important factor that may have been critical is the decline and volatility of stock prices in the capital market,'' NCAER said in its latest quarterly review of the Indian economy.

While the GDP forecast after the first quarter pegs the lower growth this fiscal than last year, it represents improvement over the projections of 7.7 per cent in April, 2006.

This improvement has come from industry and services, essentially capturing the effect of higher levels of FDI flows.

However, the dip in BCI and reduced level of GDP rate of 7.9 per cent reflects a higher rate of inflation, relatively larger fiscal deficit of the Centre and a larger current account deficit.

''In the case of governmet spending, higher prices and interest rate implies more expenditure relative to revenue. The higher prices also imply lower export growth. Although import growth also declines, it is not sufficient to offset the impact of the decline in export growth on current account deficit,'' the reputed think tank said.

In the current year, the progress of the monsoon has not been entirely satisfactory. Up to mid-July, the rainfall was above normal only in the eastern region of the country. The overall assessment for the current kharif season presented in the NCAER review is that the output may be only marginally better in the case of foodgrains output than last year.

''The oilseed output is expected to be lower while cotton and sugarcane would do better than in the last year''.

The high oil prices have put pressure on the Government to support higher levels of subsidies on petroleum products, especially in the case of kerosene, Liquefied Petroleum Gas (LPG) and High Speed Diesel (HSD).

The retail prices of petrol and HSD were raised in June 2006, but a significant level of increase in the international prices was absorbed by both the Central and State Governments by reducing tax rates. The high prices, if passed on to the retail level would mean a higher cost of living for consumers and might translate into demands for higher wages.

However, by not passing on the higher prices, the Government is not promoting the conservation, substitution and investments necessary for more efficient utilisation of petroleum products. The Industrial Sector is witnessing a high rate of output growth for the third year in a row: the rate of growth of the Index of Industrial Production (IIP) for manufacturing was nine per cent per year for past two years. The first two months have again seen more than 10 per cent growth in the IIP for manufacturing over the same period last year.

Thus, although volatility in capital markets affected implementation of new investment plans (as indicated by the drop in fresh IPOs by the corporate sector) the output performance continued to be strong.

Among industries GDP from construction sector has grown by 12 per cent for the second year in succession in 2005-06. Supply of housing loans has spurred demand for housing construction and infrastructure projects, Urban infrastructure development has contributed to the strong growth of this sector.

''The rise in interest rates in the current year would have a negative impact on demand for new construction but this negative impact may be offset by income growth if the pace of the economic growth remains high due to other factors such as growth of manufacturing and services sectors,'' the review said.

Despite the large outflows of foreign exchange under the merchandise trade account, strong inflows under the invisibles account kept the overall current account deficit within two percentage of GDP in 2005-06.

Foreign exchange reserves now stand at 162 billion dollar as compared to 152 billion dollar at the end of March 2006.

There are also, however, some concerns. Merchandise exports may grow at nearly the same rate in the first quarter of 2006-07 on a year-on-year basis, as in the first quarter of last year.

But imports increased at a much slower rate relative to the growth in the same period last year. Moreover, the growth of non-oil imports was even slower indicating some deceleration in investment activity.

UNI