New Delhi: The Prime Minister’s Economic Advisory Council on Wednesday projected a more robust GDP growth rate of 6.5% for 2009-10 than either the Planning Commission or RBI estimates. Significantly, it has also pitched for keeping interest rates unchanged. RBI is slated to present its mid-term review of monetary policy on Tuesday, where it will take a call on policy rates. The GDP estimate is, however, a shade lower than 2008-09’s 6.7%. The EAC also projected headline inflation of 6% by March 2010, with food prices posing the biggest challenge.

Releasing the Economic Outlook 2009-10, EAC chairman C Rangarajan said the present interest rate regime may continue at the moment, while acknowledging the need going forward to change the highly accommodative monetary policy. He said RBI would take a call on policy rates keeping in mind the growth prospects and inflation.

“I think the fiscal stimulus and monetary easing has helped the economy, but we need to make sure that we have an exit policy in place as the economy strengthens,” he said. Rangarajan said the economy would perform better in the second half of the current fiscal, riding a domestic recovery and global return to stability. The EAC has broadly suggested continuing with expansionary fiscal and monetary policies this fiscal.

The EAC’s robust GDP growth projection—higher than the Planning Commission estimate of 6.3% and RBI’s 6%—comes on the back of expected double-digit expansion in industrial growth in coming months. The outlook projects GDP growth to range between 6.25% and 6.75%, with 6.5% being the best estimate.

FE broke the news of the higher IIP estimates by EAC on Tuesday. The EAC projected the index of industrial production to grow at 8.2% in 2009-10, up from 3.9% in 2008-09. IIP expanded at 5.8% between April and August. The services sector is projected to grow at a similar rate of 8.2% in 2009-10, slightly lower than 2008-09’s 9.7%. A contraction of 2% is seen in the agricultural sector, as scanty rains adversely affect cultivation and farm output. Despite a slowdown in economic growth, the EAC projected the investment rate to continue at a healthy 36.5% in 2009-10, the same level as last year. It projected a marginal rise in the savings rate to 34.5% in 2009-10, from 33.9% in the 2008-09, expecting higher retail earnings by Indian companies.

While attributing the phenomenal rise in the fiscal deficit to additional outlays on subsidies, pay revision, farm loan waiver and increased coverage of NREGA, the EAC said it could go down by 1.5% of GDP in 2010-11 if expenditure under these heads is kept constant next fiscal. It stressed the need to bring down the high fiscal deficit, which is projected at 10.09% (including that of states) in 2009-10.

On the trade front, the EAC sees a marginal increase of 0.5% in India’s merchandise exports to $183 billion in 2009-10 thanks to the performance of sectors like gems & jewellery and textiles in the last six months of 2009-10. This projection comes despite a 9% contraction in global trade in 2009 forecast by the World Trade Organisation.

The EAC expects a 4% contraction ($281 billion) in imports in the current fiscal, mainly due to lower demand for industrial raw materials, capital goods and crude oil in the first half of 2009-10. It projects a 15% dip in India’s crude oil bill in 2009-10, with the assumption that the commodity will cost an average of $72 a barrel in the remaining months of 2009 and $75 in early 2010. The value of non-oil imports--mostly industrial raw materials and intermediates, capital goods and some food products--is thus likely to increase 10% over the full year, after having marginally declined in the first half of 2009-10.

The EAC expects capital inflows to increase significantly this fiscal to $57.3 billion in 2009-10 from $9.1 billion in 2008-09 due to improved equity and portfolio inflows, higher NRI deposits and a revival in overseas loans raised. This will help to finance a current account deficit, which is estimated at a modest $25 billion, or 2% of GDP, in 2009-10, down from 2.6% in 2008-09. On the policy side, the EAC has argued for improving farm productivity, strengthening the public distribution system and protecting and enhancing the rabi crop. Also, bemoaning that electricity shortages are the biggest problem in India’s infrastructure, it called for an active plan instead of an indicative one to create power capacity. It said work must start immediately to benefit from the Indo-US nuclear deal.