GDP to grow at 9pc; restrict capital inflows: EAC

New Delhi, July 16: The Prime Minister's Economic Advisory Council(EAC) today projected the economy to grow at nine per cent during 2007-08 with inflation being maintained at four per cent and advised the government to maintain a judicious mix of instruments to moderate the impact of capital inflows.

The EAC expects that the fiscal deficit target of 5.2 per cent of GDP for the year to be achieved; put the Current Account Defict(CAD) at 1.5 per cent of GDP and worked out that the minimum reserve accretion would be of the order of 40 billion dollars.

The EAC called for moderation of capital inflows. In this regard the Council suggested further liberalisation of capital outflows and elimination of impediments and administratrive and procedural hassels in the way of such outflows, besides restrictions on 'some capital inflows'.

Addressing a press conference here, EAC Chairman C Rangarajan said the present growth was currently led by investment than consumption.

The nine per cent growth rate projection is on the assumption of a ''reasonably begining to monsoon and other external conditions,'' he said.

The EAC Report, entitled 'Economic Outlook', projects slightly lower growth. Farm sector incomes are expected to grow by 2.5 per cent, industrial output to expand by 10.6 per cent and service sector to grow by 10.4 per cent.

''Global economic conditions do not seem to contain significant adverse potential during the current fiscal. The primary downside risk to our expectations of economic performance in 2007-08 derive from uncertainities on acount of the South West monsoon-- both in regard to its quantum and its spatial and temporal distribution'', Dr Rangarajan said.

The Report says in the medium to long term the principal constraints in sustaining high rates of growth derive from two basic sources, namely, the farm and power sectors, where special circumstances obtain.

Dr Rangarajan stated there were three instruments or channels through which policy makers can act in the face of strong capital inflows. One, Dr Rangarajan said, is to let the rupee appreciate. The second channel is to absorb the capital flows into reserves and to sterilise the excess over what may be regarded as appropriate.

The third channel is to further liberalise and remove impediments and administrative and procedural hassels in the way of capital outflows, and discourage inflows by putting restrictions on some capital inflows.

''Instead of arguing for any one of the instruments to be used, we urge that there must be a judicious mix of all the three instruments,'' Dr Rangarajan said.

He said there has been considerable discussion as to whether the recent spurt in economic growth was cyclical, in the sense of being driven primarily by leveraged consumption demand.

However, if adequate attention was not paid to augmenting infrastructure, particuarly power supply, overheating may persist on account of productivity and supply constraints.

Dr Rangarajan said there has been considerable progress towards fiscal consolidation. The aggregate fiscal defcit of the Centre and States in 2006-07 is estimated at 6.3 per cent of GDP. In 2007-08 it is likely to be even lower at 5.2 per cent, with the States having reached their mandated targets ahead of schedule.

The Central governments revenue deficit, however, is unlikely to be eliminated by 2008-09.

There are also substantial off budget liabilities aggregating two per cent of GDP and potential expenditure increase after the Sixth Pay Commission makes its recommendations, he said.

UNI