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NCAER pessimistic on economic recovery - Views on News from Equitymaster
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  • Oct 7, 1999

    NCAER pessimistic on economic recovery

    The National Council for Applied Economic Research (NCAER) has stated that the economic recovery is unlikely to be sustained in view of the below normal monsoon, worsening fiscal situation and increase in international oil prices.

    The think tank has reasoned that the agricultural growth this year is likely to fall to 3% as compared to 6% in the previous year. The increase in oil prices is expected to adversely impact the trade deficit and inflation levels. The worsening fiscal situation will not permit the high level of public investment needed to support an industrial recovery. Other factors include the low level of bank credit to the commercial sector and lower growth in imports.

    The NCAER has continued to tread a cautious path while predicting an economic recovery even as other authorities have spoken strongly in favour.

    Source: RBI Annual Report

    Agricultural growth over the last several years has been very erratic with a boom year followed by a dull one. As agricultural production had touched an all time high last year, a moderation in growth levels was to be expected. Monsoon received this year has been at 95% of normal, much better than widely believed to be. The late pick up in monsoon activity has also led to the agricultural ministry estimating that production could be even higher than anticipated.

    An increase in oil prices, as stated, will adversely affect the Indian economy. However, the adverse effect on the trade deficit would be moderated by reduced imports of petroleum products (like diesel), as domestic refining capacity in India exceeds domestic demand for the first time. The rise in prices will also lead to a reduction in the deficit of the oil pool account, thereby improving the overall fiscal position.

    Source: CMIE

    A pick up in industrial activity will improve tax collections, as already witnessed in the last few months. Although the collections have at times fallen below the estimates, the increase does point to an uptrend in the industrial sector. A further pick up in activity will help mitigate the dismal fiscal position of the government.

    The think tank has pointed to the low growth in bank credit to the industrial sector. Commercial bank credit is a lagging indicator of economic/industrial recovery and therefore slow growth does not suggest that the recovery will be short lived.

    The NCAER's view is well respected and will no doubt lead to a reworking of numbers. The view that these factors may not have that great an adverse impact, however, also needs to be considered.



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