Fixation of Nutrient Based Subsidy (NBS) rates for Phosphatic and Potassic (P&K) fertilizers for the year 2012-13

The Cabinet accorded approval for the proposals of the Department of Fertilizers for fixation of rates of Nutrient Based Subsidy (NBS) for the year 2012-13, w.e.f 1st April 2012. It has approved per Kg NBS rates of fertilizer nutrients namely Nitrogen (N), Phosphate (P), Potash (K) and Sulphur (S)for the financial year 2012-13 at Rs. 24, Rs. 21.804, Rs. 24 and Rs. 1.677 respectively. Accordingly, the subsidy on Di-Ammonium Phosphate (DAP) and Muriate of Potash (MOP) would be Rs. 14350 PMT and Rs. 14440 PMT, respectively. The per Metric Tonne subsidy on other P&K fertilizes covered under the Nutrient Based Subsidy Policy shall be as per the nutrient content in that grade.

At the announced rate, total subsidy outgo for the P&K fertilizers for the financial year 2012-13 would be reduced by more than 20%. The total subsidy outgo for P&K fertilizers for 2012-13 will depend on the overall consumption of fertilizers in the year 2012-13.

All farmers in the country will be the beneficiaries.

Background

The Department of Fertilizers is implementing Nutrient Based Subsidy Policy for the P&K fertilizers w.e.f. 1.4.2010. As per NBS Policy, the Government of India announce NBS rates for various nutrients for P&K fertilizers covered under the policy before the start of financial year.

This is to make P&K fertilizers available at a price lower than its delivered cost. These subsidized fertilizers would be available to all the farmers of the country. It is expected that farmers will make optimum use of fertilizers in order to increase the productivity of soil thereby ensuring food security.

Estimates of Gross Domestic Product for the Third Quarter (October-December) of 2011-12

The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation has released the estimates of Gross Domestic Product (GDP) for the third quarter (October-December) Q3 of 2011-12, both at constant (2004-05) and current prices, alongwith the corresponding quarterly estimates of Expenditure components of the GDP. The details of the estimates are presented below.

I           ESTIMATES OF GDP BY ECONOMIC ACTIVITY

(a)        At constant (2004-05) prices

2.         Quarterly GDP at factor cost at constant (2004-05) prices for Q3 of 2011-12 is estimated at Rs. 13,39,603 crore, as against Rs. 12,62,794 crore in Q3 of 2010-11, showing a growth rate of 6.1 per cent over the corresponding quarter of previous year.  Quarterly estimates and growth rates of 2010-11 have undergone revision on account of revision in annual estimates of 2009-10 and 2010-11. The revision in annual estimate of 2009-10 is mainly on account of using ASI data for 2009-10 and the new series of IIP for 2010-11 in the manufacturing sector. These changes have also resulted in changes in estimates of ‘trade, hotels and restaurants’ sector.

3.         The economic activities which registered significant growth in Q3 of 2011-12 over Q3 of 2010-11 are, ‘electricity, gas & water supply’ at 9.0 per cent, ‘construction’ at 7.2 percent, ‘trade, hotels, transport and communication’ at 9.2 per cent, and ‘financing, insurance, real estate and business services’ at 9.0 per cent and ‘community, social & personal services’ at 7.9 per cent.  The growth rate in ‘agriculture, forestry & fishing’, ‘mining and quarrying’ and ‘manufacturing’ is estimated at 2.7 per cent, (-) 3.1 per cent and 0.4 per cent, respectively in this period. 

4.         According to the second advance estimates of production of crops released on 3.2.2012 by the Department of Agriculture and Cooperation (DAC), which has been used in compiling the estimate of GDP from agriculture in Q3 of 2011-12, the production of coarse cereals and pulses during the Kharif season of 2011-12 is estimated to have declined by 4.6 per cent and 10.3 per cent respectively, and rice has increased by 11.8 per cent over the corresponding season in the previous agriculture year.   Among the commercial crops, the production of oilseeds is estimated to have declined by 5.1 per cent during the Kharif season of 2011-12, while the production of sugarcane and cotton is expected to grow by 1.6 per cent and 3.3 per cent, respectively, during the agriculture year 2011-12. However, horticultural crops and livestock products are expected to grow at 2.6 per cent and 4.7 per cent, respectively, during 2011-12.

5.         According to the latest estimates available on the Index of Industrial Production (IIP), the index of mining, manufacturing and electricity, registered growth rates of (-) 4.6 per cent, 0.8 per cent and 9.6 per cent, respectively in Q3 of 2011-12, as compared to the growth rates of 6.3 per cent, 9.2 per cent and 6.5 per cent in these sectors in Q3 of 2010-11.  In the mining sector, production of coal and crude oil registered growth rates of 0.8 per cent and (-) 4.1 per cent in Q3 of 2011-12, as against the growth rates of 1.6 per cent and 15.5 per cent in Q3 of 2010-11. The key indicators of construction sector, namely, cement and consumption of finished steel registered growth rates of 9.4 per cent and 10.0 per cent, respectively in Q3 of 2011-12.

6.         Among the services sectors, the key indicators of railways, namely, the net tonne kilometers and passenger kilometers have shown growth rates of 5.3 per cent and 5.6 per cent, respectively in Q3 of 2011-12, as against the growth rates of 4.0 per cent and 6.2 per cent, in the corresponding period of previous year.  In the transport and communication sectors, the sale of commercial vehicles, cargo handled at major ports, cargo handled by the civil aviation and passengers handled by the civil aviation registered growth rates of 22.0 per cent, (-) 4.8 per cent, (-) 2.8 per cent and 12.9 per cent, respectively in Q3 of 2011-12 over Q3 of 2010-11.  The key indicators of banking, namely, aggregate bank deposits and bank credits have shown growth rates of 11.9 per cent and 10.7 per cent, respectively during April-December, 2011-12 over the corresponding period in 2010-11.  

(b)        At current prices

7.         GDP at factor cost at current prices in Q3 of 2011-12, is estimated at Rs. 21,50,159 crore, as against Rs. 18,82,269 crore in Q3, 2010-11, showing an increase of 14.2 per cent. 

8.         The wholesale price index (WPI), in respect of the groups food articles, non-food articles, fish, minerals, manufactured products, electricity and all commodities, has risen by 6.3 per cent, 4.0 per cent, 20.4 per cent, 22.4 per cent, 7.9 per cent, 2.6 per cent,  and 8.9 per cent, respectively during Q3 of 2011-12, over Q3 of 2010-11. The consumer price index for industrial workers (CPI-IW) has shown a rise of 8.4 per cent during Q3 of 2011-12 over Q3 of 2010-11.

II         ESTIMATES OF EXPENDITURES ON GDP

9.         The components of expenditure on gross domestic product, namely, consumption expenditure and capital formation, are normally measured at market prices.  The aggregates presented in the following paragraphs, therefore, are in terms of market prices.

Private Final Consumption Expenditure

10.       Private Final Consumption Expenditure (PFCE) at current prices is estimated at Rs. 13,56,576 crore in Q3 of 2011-12 as against Rs. 11,78,121 crore in Q3 of 2010-11.  At constant (2004-05) prices, the PFCE is estimated at Rs. 8,69,193 crore in Q3 of 2011-12 as against Rs. 8,18,122 crore in Q3 of 2010-11. In terms of GDP at market prices, the rates of PFCE at current and constant (2004-05) prices during Q3 of 2011-12 are estimated at 58.9 per cent and 60.4 per cent, respectively, as against the corresponding rates of 58.4 per cent and 60.4 per cent, respectively in Q3 of 2010-11.

 

Government Final Consumption Expenditure

11.       Government Final Consumption Expenditure (GFCE) at current prices is estimated at Rs. 2,96,369 crore  in  Q3 of  2011-12 as against Rs. 2,61,431 crore in Q3 of 2010-11. At constant (2004-05) prices, the GFCE is estimated at Rs. 1,75,952 crore in Q3 of 2011-12 as against Rs. 1,68,576 crore in Q3 of 2010-11. In terms of GDP at market prices, the rates of GFCE at current and constant (2004-05) prices during Q3 of 2011-12 are estimated at 12.9 per cent and 12.2 per cent, respectively, as against the corresponding rates of 13.0 per cent and 12.5 per cent, respectively in Q3 of 2010-11.

 

Gross Fixed Capital Formation

12.       Gross Fixed Capital Formation (GFCF) at current prices is estimated at Rs. 6,37,212 crore in Q3 of 2011-12 as against Rs. 5,99,854 crore in Q3 of 2010-11. At constant (2004-05) prices, the GFCF is estimated at Rs. 4,32,169 crore in Q3 of 2011-12 as against Rs. 4,37,564 crore in Q3 of 2010-11. In terms of GDP at market prices, the rates of GFCF at current and constant (2004-05) prices during Q3 of 2011-12 are estimated at 27.6 per cent and 30.0 per cent, respectively, as against the corresponding rates of 29.8 per cent and 32.3 per cent, respectively in Q3 of 2010-11.

13.       Estimates of GDP at factor cost by kind of economic activity and the Expenditures on GDP at market prices for Q3 and April-December, 2009-10, 2010-11 and 2011-12 at constant (2004-05) and current prices, are given in Statements 1 to 8.

14.       The next release of quarterly GDP estimate for the quarter January-March, 2012 (Q4 of 2011-12) will be on 31.05.2012.

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Health outlay to be increased to 2.5 % of GDP

As directed by the Prime Minister a meeting was held in PMO on Government’s priorities in Health sector, particularly over the next 5 years. The meeting specifically focused on implementation of recommendations of the National Commission for Macroeconomics & Health (NCMH) and the High Level Expert Group (HLEG) on Health set up by Planning Commission.

The Prime Minister has emphasized the need for increased outlay on health sector during 12th Plan so that adequate funds are made available for the sector. He has also stated that though funds for the Health sector will not be a constraint, there is a need to create adequate capacity at the centre and the states to meaningfully absorb the increased outlay.

The meeting decided that we must work towards increasing the total government health expenditure to 2.5% of GDP by the end of the Twelfth Plan: currently it is around 1.4%. The Planning Commission was requested to allocate adequate resources to achieve the target. As health is primarily a State subject, the outlay of States for health would be critical in achieving this target. The Planning Commission may motivate and incentivize the States to allocate more funds for the health sector. For this purpose the Planning Commission in consultation with the Health Ministry will also work out an appropriate mechanism / scheme for this purpose.

The Health Ministry is working towards the goal of Universal Health Care for all. In the meeting it was decided that the Ministry may specifically focus on the following:

a) Health Ministry has proposed a new initiative called `Free medicine for all through Public Health Facilities` under the National Rural Health Mission (NRHM). The Cabinet has approved the setting up of a Central Procurement Agency for bulk procurement of drugs. Ministry may set up the CPA early and prepare Standard Treatment Protocols.

b) Strengthening facilities at the Primary Health Centres, Community Health Centres and District Hospital so as to provide a minimum package of care to all citizens through provision of cashless, hassle free outpatient, inpatient and diagnostic care and supply of essential medicines. Ambulance services will be strengthened to provide access to health services to far off and inaccessible areas.

c) Strengthening enforcement mechanism of drug control. The Drugs and Cosmetics (Amendment) Bill may be examined early so that it is introduced in Parliament soon.

d) In order to focus on prevention of disease and promotion of good health the Ministry will work closely with agencies dealing with social determinants of health like nutrition, safe drinking water, hygiene and sanitation and education. The Ministry will also work towards strengthening of public health through creation of necessary human resources capacities at all levels. An approach paper for induction of Health Managers and creation of a Public Health Cadre is to be prepared for inclusion in the 12th Plan.

e) Building human resources for health through producing adequate number of doctors, nurses, ANMs and other paramedics. In this regard the Ministry may work towards getting the National Commission on Human Resources in Health (NCHRH) Bill passed by the Parliament early.

f) Ministry may prepare a clear roadmap to merge all the NRHM schemes to bring them under one umbrella. The merger may begin with the coming financial year and the process may be completed by 2013-14.

g) The Clinical Establishments (Registration and Regulation) Act, 2010 has been passed by the Parliament. This may be brought into effect soon so that its provisions are operationalized early.

h) The work on establishment of the National Centre for Disease Control may be completed in 2 years time. The Integrated Disease Surveillance Project may be strengthened with setting up of public health laboratories in districts and states.

BGREI turns Eastern region into food surplus region

The Bringing Green Revolution in Eastern India programme launched in 2010-11 as a Prime Minster`s initiative based on the Inter Ministerial Task Force has resulted in impressive increase in production of food grains with the eastern region now turning a food surplus region. The BGREI is a subscheme of the Rashtriya Krishi Vikas Yojna (RKVYJ ) with an outlay of Rs. 400 crores in the eastern region including Assam, Bihar, Chhattisgarh, Jharkhand, Odisha, Eastern Uttar Pradesh & West Bengal.

The programme gained momentum in 2011-12 with the focus on rice and wheat only and strategic interventions relating to crop production, water harvesting and recycling, asset building and site specific activities needed for improving the agronomy-adopting cluster approach aimed at enhancing the productivity per unit area and the income of the farmers.

Eastern region hitherto known as food deficit region, has with the help of the programme, turned food surplus region. The rice production from the region is estimated at 562.6 lakh tons an increase of 19.8% over last year against an all India increase of 7%. And the foodgrain production from the region is estimated at 1032 tons an increase of 11.9% against an all India increase of 2.2%.

The increased productivity/ production was optimized due to resource allocation and utilization. The significant increase in production of food grains in the region not only offset the decline in production in central and peninsular India but also contributed significantly to the highest ever production of food grains. The growth in food grains i.e. rice and wheat provides an opportunity to procure and create food grain reserves locally reducing the pressure on Punjab and Haryana, and cutting costs on transport and other logistics.

The focus will now be to consolidate the gains with continued emphasis during the 12th Plan. Further steps will be taken to improve the infrastructure for procurement and storage of the produce and to ensure a reasonable price for the farmers.

Indian Community Welfare Fund

The Ministry of Overseas Indian Affairs provides an amount upto a maximum of Rs.15 lakh to a country in proportion to the size of the Indian work force working in that country. The Ministry’s contribution is initially for a period of 3 years or till the fund becomes self sustaining, whichever is earlier. The amount is released annually and is limited to meet the deficit in the financial resources of the missions with due regard to the utilization of the amount released during previous years. The Indian Community Welfare Fund (ICWF) Indian Missions is placed at the disposal of the Heads of Missions and the Mission keeps the record of utilization of fund and beneficiaries. The Ministry has extended the ICWF in Indian Missions across the world.

The Indian Community Welfare Fund is aimed at providing ‘on site` welfare services on a means tested basis in the most deserving cases including: (i) Boarding and lodging for distressed overseas Indian workers in household / domestic sectors and unskilled labourers; (ii) Extending emergency medical care to the overseas Indians in need; (iii) Providing air passage to stranded overseas Indians in need; (iv) Providing initial legal assistance to the overseas Indians in deserving cases, (v) Expenditure on incidentals and for airlifting the mortal remains to India or local cremation/burial of the deceased overseas Indian in such cases where a sponsor is unable or unwilling to do so as per the contract and the family is unable to meet the cost. The procedure for disbursement of the fund is as under:

i. The Head of Mission will consider requests, written or verbal, depending upon the seriousness or sensitivity of the circumstances on a case to case basis.

ii. The Officer in charge of the Labour Wing or the Officer designated for the purpose by the HOM will examine the case and forward his recommendation for HOM’s approval. iii Assistance towards boarding expenses per head will be fixed to a limit as approved by the HOM subject to a maximum of 15 days.

The expenditure on incidentals and for airlifting mortal remains to India or local cremation/burial of deceased Overseas Indians in cases where the sponsor is unable or unwilling to do so as per the contract and the family is unable to meet the cost, is covered under ICWF.

Providing initial legal assistance to Overseas Indians in deserving cases on a means tested basis is one of the objectives of the scheme. The Heads of Missions/Posts are empowered to disburse from the ICWF for providing services on a means tested basis in the most deserving cases.

Review of the Economy 2011-12 Highlights

Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister released the document ‘Review of the Economy 2011-12’ at a Press Conference in New Delhi today. Following are the highlights of the document:

Review of the Economy 2011-12

§         The rate of growth in 2011-12 is now estimated at 7.1%, which is marginally higher than the projection of 6.9% as per the Advance Estimates (AE). The Council projects a slightly higher growth for agriculture and construction than the Advance Estimates.

§         Investment activity has slowed down and as a result the Gross fixed Capital formation (GFCF) for 2011/12 has slipped to 29.3 per cent, a decline of almost 4 percentage points over the last four years.

§         Global economic and financial conditions likely to remain under pressure during the year.

§         Overall farm sector GDP growth for 2011/12 will average 3 per cent, riding high on record outputs for rice, wheat and strong trend growth in horticulture and animal husbandry.

§         Mining and quarrying sector likely to report negative growth for 2011/12 on account of weak coal output growth, restrictions imposed on iron ore production, decline in natural gas production and negative growth in crude oil output.

§         Electricity sector has performed well. It is expected to grow at 8.3 per cent during 2011/12.

§         Manufacturing and construction have been sluggish during the first three quarters of 2011/12. This may show improvement in the last quarter. The overall growth rate will be 3.9 per cent and 6.2 per cent respectively.

§         Strong growth in the services sector will continue with overall growth of 9.4 per cent for 2011/12.

§         For the year as a whole the Balance of Payment (BoP) position will be tight, this clearly indicates the need to keep the Current Account Deficit (CAD) within limits.

o       CAD has weakened, averaging 3.6 per cent (annualized) of GDP in the first half of 2011/12.

o       CAD for the 2011/12 is projected to be 3.6 per cent.

§         Headline inflation has shown decline since November 2011 and more strongly in January 2012. It is projected to be around 6.5 per cent at the end of March 2012. Policies-both monetary and other public policies seem to have had the desired effect.

§         Sustained high food prices particularly on account of fruit, milk, eggs, meat & fish began to get passed into the price behaviour of manufactured goods.

§         Year-on year inflation for manufactured goods rose from around 5 per cent in September 2010 to 8 per cent in September and October 2011.

§         Expansion of the fiscal deficit beyond its budgeted estimate of 4.6 per cent of GDP -an area of concern. Government must strive to contain and improve the efficacy of subsidies.

Prospects for 2012/13

§         Economy is likely to grow in the range of 7.5 to 8 per cent. Mining and manufacturing are expected to show substantial improvement in 2012/13 over the previous year.

§         Inflationary pressure will continue to ease through 2012/13 and will remain around 5-6 per cent for the year.

§         Vigil to be kept on food prices-focus on production as well as rolling out of adequate food logistics network.

§         Greater need to invest in the infrastructure for both capacity creation as well as operational performance in coal, power, roads and railways.

§         Need to make adjustments on sale of refined petroleum products to reduce the huge burden of subsidy.

§         In the year 2012/13 CAD is projected to be around 3.0 per cent of GDP.

§         Efforts be made to keep the CAD between 2.0 and 2.5 per cent of GDP over the medium term.

§         Capital inflows particularly in the form of equity must be encouraged along with improved domestic conditions for investment and growth.

§         Government must effectively lay out a road map to achieve fiscal consolidation.

§         Government borrowing programme must not affect the financing needs of the private sector.

§         For the overall macroeconomic stability, attention must be paid to prices, exchange rate and fiscal balances.

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Review of the Economy 2011-12 Summary

Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister released the document ‘Review of the Economy 2011-12’ at a Press Conference in New Delhi today. Following is the summary of the document:

Review of the Economy 2011-12

1.      The rate of growth in 2011-12 is estimated at 7.1%, which is marginally higher than the projection of 6.9% as per the Advance Estimates (AE). The council projects a slightly higher growth for agriculture and construction than the Advance Estimates.

2.      Gross fixed capital formation (GFCF) as a proportion of GDP had reached a peak of 32.9 per cent in 2007/08, the year preceding the global crisis. It dropped to 32.3 per cent in 2008/09 and then to 31.6 per cent in 2009/10. Initial estimates are that in 2010/11 this ratio slipped further to 30.4 per cent. The AE for 2011/12 suggest that there may have been further slippage to 29.3 per cent. That is a decline of almost 4 percentage points over the last four years.

3.      International conditions continued to worsen through 2011. The negative developments in the Eurozone outweighed the small improvements in evidence in the US economy. It is possible that the US economy will grow by more than the 1.8 per cent projected by the International Monetary Fund (IMF) in September 2011 and reiterated in January 2012.

4.      Large scale liquidity injection by the European Central Bank (ECB) since December 2011 has lowered yields on the government bonds of those countries under the magnifying glass. Though there is yet no resolution in sight and affected countries have large volumes of debt due for roll over, there is some improvement in the situation, insofar as the potential for shocks are concerned. Germany seems to be willing to provide extended support, partly as a result of which the European Central Bank (ECB) has provided large amount of finance through their banking system (€ 489 billion), which may go up further (to € 1 trillion). The Eurozone members appear to have signed up for a coordinated move towards a fiscal union – which is necessarily a precondition for a monetary union with a membership of heterogenous economic strength to survive.

Sectoral Developments

5.      Farm sector output growth in 2011/12 has been strong, coming on top of the strong growth in the previous year. The average GDP growth rate that has been reported for the farm sector in the first half of 2011/12 is 3.7 per cent. The Council expects that in combination with the strong trend growth in horticulture and in the animal husbandry sectors, the overall farm sector GDP growth for 2011/12 will average 3 per cent.

6.      The mining & quarrying sector has shown particular weakness this year. This was a combination of weak coal output growth – which was negative in four months of the year – a sharp decline in natural gas production in the KG-D6 fields and negative growth in crude oil output in the third quarter of the year. There has been improvement in coal output from November 2011 onwards. However, natural gas output growth is likely to remain in the negative for the rest of this fiscal. Crude oil production showed a decline of 4 per cent in Q3 of 2011/12, but is expected to recover in the last quarter. Moreover, restrictions imposed by the Courts on iron ore production in some parts of the country have also resulted in lower output. In consequence, the mining & quarrying sector is likely to report negative growth for the year as a whole – for the first time in three decades. The AE has placed this at (–) 2.2 per cent, an inference that appears to be accurate.

7.      While the electricity sector has performed well, manufacturing and construction have disappointed – the former particularly so from the second quarter onwards with October marking the bottom of the trough. IIP output growth showed a massive decline of 5.7 per cent in October, a sizeable recovery in November (6.6 per cent), with however a low reported growth in December of 1.8 per cent. Contributing principally to the latter was a large decline reported for capital goods, a component that has shown large volatility. If the capital goods component were to be excluded, the rest of the IIP would be seen to have shown a growth of over 5 per cent year-on-year. On average, the GDP arising in the manufacturing sector for Q3 is likely to be close to 1 per cent. The Purchase Managers Index (PMI) for January 2012 suggests a sizeable expansion and the output growth in the last quarter may on average be around 4 per cent. For the year as a whole the growth rate in manufacturing sector will be 3.9 per cent. In the construction sector there should be some improvement in the second half, a view that is reinforced by the strong rise (13 and 17 per cent) in cement output in November and December 2011. Hence, the growth rate in the construction sector for the year as a whole will be 6.2 per cent.

8.      Growth of GDP in the services sector was 9.6 per cent in the first half of 2011/12. The Council expects that service sector growth will continue to be strong in the second half and will close the year with growth of 9.4 per cent, slightly less than that in the first half.

External Payments

9.      The pressure on the Balance of Payments (BoP) – both in regard to a larger than expected Current Account Deficit (CAD) and lower than expected net capital inflows – resulted in a very sizeable depreciation in the external value of the Indian rupee. In the fiscal year to date, the nominal terms of trade weighted 6-currency index fell by 14 per cent, while in terms of the inflation adjusted effective exchange rate (REER) the decline was 11 per cent. The decline of the rupee vis-à-vis the US dollar was 19 per cent in the course of April–December 2011. However, there has been some recovery in the course of January and February 2012, with the rupee recovering about 7.5 per cent. The last few months have been about the most volatile period for the external value of the currency.

10.  The CAD has weakened much more than was expected, averaging 3.6 per cent of GDP in the first half of 2011/12. The position in the third quarter was much tighter than in the first two, as a result of a combination of a significant enlargement of the CAD and further weakness in capital inflows. The situation will improve in the on-going last quarter. However, for the year as a whole, the BoP position will be tight and CAD will be 3.6 per cent of the GDP.

11.  In a medium term sense, the weakening of the currency – in nominal and even more so in real terms – not only reflects the current situation of demand and supply of foreign exchange, but outlines a scheme for the stabilization and improvement of the external payments situation. A weaker currency can by improving the prospect of exports – of both goods and services – and also by making the price of Indian assets more attractive to foreign investors, help to contract the CAD.

12.  However, there are three problems that we must guard against. First, a sharp depreciation can impact the liability side of corporates to an extent that it weakens their ability to invest. That can dampen the recovery in the pace of economic growth. Second, capital inflows are a steady activity over time and if the impression gains ground that depreciation is likely to be a recurring theme, investors will tend to factor in this aspect in their valuation and to that extent it will have a negative impact on the perceived value of Indian assets. Finally, the CAD in India has an idiosyncratic element. The import of gold, which is viewed by many, if not most, Indian buyers as an investment object, forms a large component in overall imports and variation in this element accounts for a very sizeable component in the change in CAD. The dynamics that influence the import demand for gold seems to be most closely related to those which influence asset holding, rather than those which influence merchandise imports.

Inflation and Monetary Policy

13.  Very high rates of inflation have characterized the last two years. Much of the inflationary pressure came from primary foods, including cereals in the initial months. While, open market intervention and large releases under the public distribution system (PDS) helped to stabilize the price of cereals, pressure continued to come from rising prices from other primary food items – especially pulses, milk, eggs, meat & fish. Greatly improved output of kharif pulses in 2010 combined with marketing of imported pulses at controlled prices, helped to curtail the inflation in pulses by July 2010. However, prices continued to rise for fruit, milk, eggs and meat & fish. The prices of vegetables took an unexpected turn in December 2010 and January 2011, resulting in an increase in the wholesale price index of vegetables by 34 and 67 per cent respectively in these two months. In consequence, primary food price inflation stayed in the double digits.

14.  Such a lengthy period of sustained high food price inflation had its expected impact on money wage rates and other cash expenses, which in turn began to get passed into the price behaviour of manufactured goods. Year-on-year inflation for manufactured goods rose from around 6 per cent to 8 per cent in September and October 2011. The net effect was that the headline rate of inflation stayed close to 10 per cent for an extended period of twenty two months. However, throughout this period there has also been a suppression of the headline rate insofar as the prices of several refined petroleum products, especially diesel, continued to be restrained by policy – which has had an adverse impact on the subsidy bill and therefore on government finances and also on the finances of the public sector oil companies.

15.  The effort of public policy, especially monetary policy, seems to have had its desired effect. The headline rate dropped to 9.1 per cent in November and further to 7.5 per cent in December and has dropped further in January 2012 to 6.55 per cent. The welcome developments in the easing of inflationary pressures will enable the RBI to adjust its monetary stance over the next several months. However, the continued pressure from the fiscal side will continue to impose some limitations.

Prospects for 2012/13

16. Investment & Growth: With a return of price stability, appropriate supportive policy and administrative measures, it is possible to visualize an improvement in the investment rate, notwithstanding difficult conditions in the international financial markets. An improvement of 1.5 to 2.0 percentage points of GDP can be envisioned in the fixed investment rate in 2012/13. Price stability will also normalize consumption demand. The weaker currency is likely to improve the prospects for net export demand. However, there is a fairly wide range of outcomes both on investment side, on the financial side and on the trade front that may be reasonably envisaged. Under these circumstances the Council feels that the economy is likely to grow in the range of 7.5 to 8.0 per cent.

17. Infrastructure: As far as the role of Government is concerned, it can express itself most powerfully in the infrastructure area – in power, roads, railways, ocean ports and air ports, in rural and urban infrastructure. The inadequacy of infrastructure availability continues to act as a constraint for the expansion of economic activity across the country. It is likely that the targets set for 2011/12 in power and roads may be achieved. Government must set ambitious targets for 2012/13 for both capacity creation in key infrastructure areas and operational performance, especially in the coal sector, such that a fillip is provided to the improvement of economic activity in 2012/13, which is also the first year of the Twelfth Plan.

18. Inflation: There have to be adjustments made to the selling prices of sensitive refined petroleum products to cover costs and reduce the huge burden of subsidy being borne by Government and the oil companies. As a result the suppressed inflation on account of incomplete cost pass through in these sensitive refined petroleum products has now to be phased out in 2012/13 and will then express itself on headline inflation. The recovery of the currency may obviate the kind of adjustments in goods that are either imported or priced on import parity that was being envisaged in the closing months of 2011. Inflationary pressure will continue to ease through 2012/13 and will remain around 5-6 per cent for the year. It will be necessary to keep a sharp vigil on food prices and take proactive measures not only to encourage output increase but equally, if not even more urgently, to ensure the rollout of an adequate food logistics network that can do justice to the rising demand for and output of horticulture and animal husbandry products.

19. External Payments: The CAD for the year 2012/13 will be 3.0 per cent. It will however, be judicious to try and limit the CAD over the medium term to between 2.0 and 2.5 per cent of GDP. On the capital account side, capital inflows especially that in the form of equity must be encouraged and improved domestic conditions for investment and growth are the basic pre-requisites, along with fundamental macroeconomic stability, i.e. prices, exchange rate and fiscal balances.

20. Fiscal deficit: The fiscal balance of the Central government in 2011/12 is likely to expand beyond its budgeted estimate of 4.6 per cent of GDP. This development has been occasioned primarily by much higher than budgeted subsidies – especially that on refined petroleum products. A large subsidy bill directly reduces the resources that are available for development expenditure, while also by expanding the borrowing needs of Government squeezes investible resources to an extent that undercuts productive investment by the private sector. In 2012/13, Government must strive to contain and improve the efficacy of subsidies, vis-à-vis the development needs that need to be carved out of the Union Budget. Adequate safeguards needs to be taken to prevent any negative fallout of the government borrowing programme on the financing needs of the private sector. It must be incontestably demonstrated that government finances are indeed on the path of fiscal consolidation thus reinforcing the final pillar of macroeconomic stability.