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FMs confidence in economy
December, 19th 2009

The finance ministry told the Parliament today that the Indian economy may grow by over 7.75 per cent this fiscal on the back of higher than expected growth in the first and second quarters of 2009-2010. Tabling the Mid-Year Review finance minister Pranab Mukherjee said that he was confident of a certain turnaround in the economy. Citing sequential rise in GDP growth rate over the past three quarters, the minister said that the trend indicated that the economic was picking up and the clouds of uncertainty had lifted. However, the government said that worry lines were not completely absent given the ongoing spurt in food price inflation

Growth in real GDP stood at 6.1 per cent in the first quarter of 2009-10, up from a level of 5.8 per cent each in Q3 and Q4 of 2008-09. The growth in real GDP in second quarter (Q2) of 2009-2010 was 7.9 per cent. GDP growth in the first half (H1) of 2009-10 is now placed at 7.0 per cent, the statement said. The finance ministry also indicated that it is likely to take a call on withdrawal of fiscal stimulus measures soon in order to meet the road map of reaching the target of 5.5 per cent fiscal deficit in 2010-11 and 4 per cent in 2011-12. This would be done keeping in view the strength of recovery, the review said. It also indicated the governments determination to push the goods and service tax regime and bring in the direct tax code citing support of the report of the Thirteenth Finance Commission.

But price rise remains a major challenge for the government. The current episode of increase in prices does not appear to be a product of aggregate demand expansion in the economy. Its dominant cause is the supply-side constraint, due to reduced food production or, more accurately, the expectations of a reduction in food production over the next months that the drought and poor monsoon in India have inevitably given rise to, the finance minister said.

It further said that the slow pick up in credit off take may not act as a brake on the growth momentum. While the overall credit demand of the manufacturing sector from the banking sector has slowed down, corporates had been able to access non-bank domestic sources of funds and external financing at lower costs. The year was also marked by the revival of net FII inflows with the BSE SENSEX rising by 73.6 per cent between end-March 2009 and November 11, 2009, which is another indication of growth. To meet its expenditure the government embarked on a heavy borrowing programme without crowding out the private sector. It completed a large part (84.68 percent) of the budgeted gross market borrowing programme during April to November 2009.

Fiscal performance in the first half of 2009-10 meets the FRBM target in respect of the benchmark of non-debt receipts at 40.5 per cent of the budget estimates (BE) 2009-10. Fiscal deficit and revenue deficit at 49.3 per cent and 58.4 per cent respectively were higher than the prescribed FRBM benchmark of 45 per cent of BE on account of on-going fiscal stimulus measures such as lower excise duties, etc.

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