A day before the Budget, the Economic Survey today predicted up to 8.75 per cent growth in 2010-11 while recommending a gradual roll back of stimulus -- a move that could entail hike in excise duty and service tax.
Warning that high double-digit food prices could lead to "higher-than-anticipated" general level of inflation, the Survey called for effective steps to be taken to remove supply-side bottlenecks together with other policies.
The Survey said the government policy, other calibrated measures and tax reliefs as contained in the stimulus have helped the economy shrug off effects of slowdown triggered by global financial meltdown in 2008.
The buoyancy in the economy in tandem with reforms would make India possibly the fastest growing economy in the next four years, it said while recommending that there was a need for improving government financial by way of raising tax and non-tax revenues and containing deficit. Last week, the Prime Minister's Economic Advisory Council too had suggested partial roll back of stimulus measures, including raising excise duty and service tax rates.
The Survey also echoed this view: "...The broad-based nature of the recovery creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last 15-18 months... so as to put the economy back on to the growth path of nine per cent annually."
The economy is projected to grow by 7.2 per cent this fiscal with industrial and services sectors growing at 8.2 and 8.7 per cent respectively. Full recovery is likely over the next two fiscals with up to 8.75 per cent growth in 2010-11 and nine per cent the subsequent year.
Critical about the government's policy, particularly over the very high consumer price inflation, the Survey said that the "hype" over kharif crop failure without taking into account the comfortable food stocks and rabi prospects "may have exacerbated inflationary expectations encouraging hoarding and resulting in a higher inflation in food items.
"... in the case of sugar, delay in the market release of imported raw sugar may have contributed to the overall uncertainty, thereby allowing prices to rise to unacceptably high levels in recent months," it added.
Elaborating on the prospects in the short and medium terms, the Survey observed that gross domestic savings stood at 32.5 per cent of GDP in 2008-09, while the gross domestic capital formation (investment) was 34.9 per cent.
"The rates of savings and investment have reached levels that even ten years ago would have been dismissed as a pipedream for India. On this important dimension, India is now completely a part of the world's fastest growing economies."
Indian economy has been one of the least affected by the global crisis. "In fact, India is one of the growth engines, along with China, in facilitating faster turnaround of the global economy. Risks, however, remain," it added.
On the foreign trade front, which had taken a beating in 2009, the economic document said it is looking up with the prospects of recovery in the world output and trade volumes.
The downside risks for world and Indian trade lie in the fact that though the fall has been arrested, both output and trade recoveries are still fragile given the fact that the recovery has been pumped up by the stimulus given by different countries, including India, the effects of which may dry up if natural recovery does not follow.