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Economic Survey: Growth is good, but then...

Feb 25, 2011

The Economic Survey for 2010-11 (FY11) was tabled in the Parliament today. It highlighted the progress made by the Indian economy in FY11 and some big challenges it faces in the future. Let us have a look at the key takeaways from the same.

Painting a rosy picture for economic growth
The Survey talks about how the Indian economy braved the global slowdown and emerged stronger in FY11. It puts out an estimated figure of 8.6% for GDP growth during the year, and also forecasts an 8.75-9.25% growth in the next fiscal (FY12). The Survey has also taken note of the deceleration in industrial growth in recent times. However, it counters it by adding that this is a short term phenomenon and that the long-term growth story remains intact. The FY12 growth estimates are backed by rising savings and investments in the country.

Overall, notwithstanding the challenges on the inflation part, the Survey has painted a rosy picture of high growth for the Indian economy going forward.

Inflation remains the bugbear
The Survey has mentioned high inflation in India as one of the key policy challenges for the government over the next few quarters. It has blamed the rise in food and global commodity prices as the key reasons for the surge in inflation since the end of 2009. The blame has also been put on the easy money policy of the western nations that are trying to jump-start their economies.

The Survey suggests that the government and the RBI are aware of the fact that there is a need to provide ample liquidity to the system so that economic growth is not hampered. However, it is also aware of the potential negative consequences of the same in the form of an even higher inflationary threat in the future.

Short and medium term prospects
As mentioned above, the Survey has projected the Indian economy to grow by 8.75-9.25% in the next year (FY12). This is expected to happen on the back of the government's push towards increased infrastructure investment and consumption. Also, given that both savings and investments are on the rise, it has indicated that the government will soon implement a gradual exit from the stimulus package.

All said, the Survey has added a caveat at the end. It suggests, "Growth forecasts, and for that matter, all forecasts in life, however carefully made, are subject to error. A sharp deterioration in weather conditions or a disproportionate spike in the price of crude petroleum can lead to slower growth." It also warns that deepening of the Euro-zone crisis can also have an adverse impact on the growth prospects of the Indian economy.

As for the long term prospects of the Indian economy, the Survey sounds a bullish tone. And it backs up this view with the usual suspects - rising savings and investment rates, and India's demographic dividend. Overall, it suggests that ‘the next two decades should see the Indian economy growing faster than it has done any time in the past and also faster than the growth in the next two years'.

Now that's like sticking the neck out. It's another thing that the neck risks getting caught in a thunderstorm of global economic crisis, rising fuel prices, and surging inflation.

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