India's growth likely to be far more than global estimates'

Stimulus package can sustain growth, says Arvind Virmani.

Ramesh Sharma

Mr Arvind Virmani, Chief Economic Advisor, Ministry of Finance (file photo). —

C. Shivkumar

Bangalore, April 10

India’s economic growth is likely to be far higher than estimates and forecasts made by multilateral institutions.

Speaking to Business Line, the Union Finance Ministry’s Chief Economic Advisor, Mr Arvind Virmani, said: “GDP growth will be far higher than World Bank, ADB or the IMF’s forecasts.”

The World Bank had estimated a growth of 4 per cent for the current financial year. The ADB and the IMF had issued forecasts of 5 per cent and 5.25 per cent, respectively, for the current year. All these institutions estimated a pick up only by the second half of 2009-10.

Mr Virmani said the current fiscal stimulus package was sufficient to sustain the growth momentum of the economy. The boost to sustain the growth momentum was provided by the increase in the fiscal deficit from 3 per cent to 6 per cent of the GDP. “The fiscal boost was 3-4 per cent of GDP,” he said. “This stimulus is the largest in the world.”

Given the current global financial situation, there was little alternative to this approach, Mr Virmani said. “Increase in the fiscal deficit was the only way to offset compression of private demand and increase public demand.”

Fuel for GDP growth

During the last few years, high rate of GDP growth was partly fuelled by investment demand. Real investment increased by 18 per cent per annum between 2003 and 2008, compared to the previous five-year annual growth figure of 9 per cent. As a result, the current investment to GDP ratio is over 40 per cent. This rise was also partly fuelled by capital flows. Foreign capital though had little impact on the economy. Mr Virmani said, “Foreign capital’s contribution was miniscule, only 0.4 per cent of the GDP.”

The Chief Economic Adviseo said, “Our concern was that investment rate would slow down too rapidly because of the financial meltdown. We expected to slow down since the investment GDP ratio is already very high. The concern is if the investment slows down to zero.”

Infrastructure focus

Accordingly, the Government was attempting to pump up public investment, particularly in developing infrastructure. The Eleventh Plan target for infrastructure investment was 9 per cent of the GDP. Currently, it is 4-5 per cent. “We cannot step up this investment overnight, but it will go up over a period,” Mr Virmani said.

To improve domestic investments by harnessing the high savings rates, he said, the Government was working towards widening the financial intermediaries.

“Our thrust is to accelerate the development of the long-term debt market for harnessing domestic savings,” he added.

 

 

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