Rising prices, turbulence in global financial markets and a possible reversal of the US dollar is likely to lower India’s GDP growth to 7.7 per cent this fiscal from 9 per cent last year even as inflation could spiral to 13 per cent over the coming months, the Prime Minister’s Economic Advisory Council (EAC) warned today.

Releasing the Economic Outlook 2008-09, outgoing chairman of the EAC, C Rangarajan, argued that considering the magnitude of adverse economic developments in 2008, the projected drop from 9 per cent last year to 7.7 per cent “is in fact modest” and attributed the slowdown to deterioration in global conditions. He warned of a possibility of food price inflation in the country. “The achievement of a reasonable rate of growth in the Indian economy is built on the presumption of a slow return to normalcy in global financial market conditions,” he said

Saying that inflation could shoot up to 13 per cent, owing to a surge in prices of commodities and underlying resource tightness, the council said that coordinated policy action coupled with monetary tightening by the Central bank could help ease inflation to 8-9 per cent by March 2009. Rangarajan said the tight monetary policy stance was imperative till the pace of inflation moderated.

Because of the risks arising out of growing off-budget liabilities, the fiscal situation too has deteriorated significantly. According to the report, off-budget liabilities in the form of fertiliser, food and oil subsidies coupled with unbudgeted subsidies such as the farm loan waiver, the NREGA scheme and the implementation of the Sixth Pay Commission could amount to 5 per cent of GDP. This is above the budgeted fiscal deficit of 2.5 per cent for the current fiscal.

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