Services to drive growth, mining set to contract

FPJ BUSINESS DESK Mumba

Indias economy may grow at 7.1 percent this financial year and pick up pace next fiscal to grow at 8 % if the global environment turns favourable, chairman of the Prime Ministers Economic Advisory Council Chakrabarty Rangarajan said on Wednesday. He added that reforms are needed to maintain the momentum.

The council has pegged gross domestic product growth at 7.1 percent for 2011- 12, marginally higher than the 6.9 percent growth projected in the advance estimate early this month by the Central Statistical Organisation ( CSO) and sharply lower than 8.4 percent expansion registered in the previous year. High interest rates, fragile global economy hurting demand governments inability to push through key reforms have stunted growth.

" We might be able to achieve 8 percent growth on our esteem, if the world environment is favourable," Rangarajan said after releasing the Review of the Economy 2011- 12.

The report has shown faith in the service sector, which is the largest contributor to Indias GDP, with 9.6 % growth in the first half of 2011/ 12 and expects it remain strong in the second half and close the year with a growth of 9.4 %, slightly less than in the first half.

" Next year also we don't see a spectacular turn around at least that is not seen if we continue to work the way we are working," he said. " Our major growth driver is service side. More growth from the service sector means we are transforming to knowledge economy," Rangarajan

said.

A record output of rice and wheat on the back of good monsoon and strong growth in horticulture and animal husbandry segments are likely to push upward the overall farm sector growth for 2011/ 12 to 3%. The farm sector, which contributes about 15 % to the GDP, had grown by seven percent in 2010- 11. The PMEAC said the second advance estimate shows a record foodgrain output of 250.4 million tonnes this year, more than the previous highest output of 244.8 million tonnes.

Weaker currency is likely to improve the prospects for net export demand.

The manufacturing sector is expected to grow by 3.9 percent while construction segment is expected to expand by 6.2 percent.

Investment activity has slowed down and as a result the gross fixed capital formation for 2011- 12 has slipped to 29.3 percent, a decline of almost four percentage points over the last four years, said Rangarajan, a former governor of the Reserve Bank of India ( RBI).

Expressing its opposition to the proposal of one PSU buying shares of others to help government raise funds, the PMEAC said it was not desirable as it would

reduce investible resources of the buying company. The receipt through disinvestment has totaled only Rs 1,145 crore this fiscal against the target of Rs 40,000 due to volatile market conditions.

Gold imports may decline to $ 38 bn Estimated to shoot up by 76 % in the current fiscal to USD 58 billion, Indias gold import may decline sharply to USD 38 billion in 2012- 13 on back of improved economic situation, PMEAC said.

The decline, the report said, would be on account of improvement in economic situation which would encourage people to invest in financial assets like mutual funds and insurance.

" The stabilisation of basic macroeconomic conditions at home is expected to curtail the demand for imported gold to be held as an asset by Indian households," PMEAC Chairman C Rangarajan said.

The rise in import of the yellow metal is attributed to investors buying the precious metal to hedge against high inflation. "... make investment in life insurance and mutual fund schemes at least as attractive, as was the case till March 2010," the report said.