Despite the high cost of funds that the industry has to bear, the economy would grow at 8.6% this fiscal and at an impressive 9% in the next as the likely decline in manufacturing activities would be compensated by greater output in the mining sector and better than expected performance by the services sector, the Prime Minister?s Economic Advisory Council chairman C Rangarajan said on Monday.
Besides, the rate of savings as well as investments in the economy are also likely to improve in the next fiscal. The council?s review of the economy for 2010-11 said that the savings rate is likely to grow marginally to 34% this fiscal and further to 34.7% in the next fiscal, while gross domestic capital formation, which is expected to grow by 35.9% this fiscal, would further improve to 37% in the next financial year.
Rangarajan?s optimistic forecast comes a week after government data showed that industrial output growth rate fell to a 20 month low of 1.55% in December 2010 from 18% a year ago. The data had also showed that capital goods output, an indicator of investments in the economy had contracted by 13.7% in December from 42.9% the same time a year ago.
Manufacturing output, which accounts for 80% of industrial output, rose only by 1% in December but in the first three quarters, it had expanded by 9.1% against 8.9% a year ago. Rangarajan, however, said that a decline in manufacturing activity would be compensated by the mining sector, particularly, oil output from Rajasthan. Output from Cairn India operated Barmer oil field had helped to step up the nation?s crude output in December 2010 by 15.8% over the same period a year ago to 3.34 million metric tonnes.
The council lowered its growth forecast for industry but raised the same for services. ?It is possible to achieve 9% growth in 2011-12 while slightly refashioning gross domestic product components,? the panel said. While lower manufacturing growth would moderate the overall industrial output to 8.1% in the current fiscal, it would grow by 9.2% in the next, the panel said. Services sector, which accounts for about 55% of the economy, would grow at 9.6% this fiscal and at 10.3% in the next, the panel said.
The panel?s bullishness on GDP growth is also based on a 5.4% growth in agriculture sector this year marked by record output in rice, wheat and oilseeds, which would further expand by 3% in the next financial year.
Capital inflows, including foreign direct and portfolio investments and debt flows are projected to grow to $64.6 billion this fiscal from $47.8 billion a year ago. This would further go up to $76 billion in the next fiscal, the panel said.
The council predicted that economic growth in the US and EU that started in the second half of calender year 2010 would be reinforced in 2011, which could further appreciate oil prices, which will have a bearing on India?s finances.
?It is critical to aggressively tackle supply bottlenecks in food, energy and raw materials so that the economy will grow in line with the underlying domestic demand without putting excessive pressure on prices,? the panel said.