E-Paper
Economic Survey warns of interest rate risk
Interest rates may head up on back of a stubbornly high fiscal deficit and rising demand for loans from industry, said the survey.
Indian interest rates, currently at three-decade lows, may head up on the back of a stubbornly high fiscal deficit and rising demand for loans from industry, the Government's Economic Survey said on Wednesday.
The survey, a report card of the economy that has come on the eve of the Budget, called for sustaining average annual growth of seven-eight per cent in the next five years, containing inflation to single digits and fiscal consolidation to slashing the deficit.
India's economy, Asia's third-largest, is expected to expand more than seven per cent this year after 8.2 per cent growth in the fiscal year ended March 2004, largely boosted by the best monsoon rains in a decade.
But the annual survey produced by the Finance Ministry said firm prices of crude oil, non-oil commodities and capital inflows could affect monetary conditions this financial year.
"With fiscal deficit remaining high and signs of a pick up in the flow of credit to the commercial sector, the possibility of interest rates moving northwards cannot be ruled out," it said.
Budget is widely expected to step up social and farm sector spending, but analysts are keenly eyeing how the Government will raise resources to meet the enhanced spending without impacting fiscal deficit.
India has estimated its fiscal deficit at 4.6 per cent of gross domestic product (GDP) in the year ended March 2004, down from 5.3 per cent a year earlier helped by buoyant tax collections.
The survey said the impact of low interest rates on Government debt was yet to be felt and fiscal consolidation along with low interest rates was needed to attain higher growth.
The survey said India's exchange rate policy should seek to curb a sharp appreciation by the rupee in a bid to keep exports competitive and stimulate growth.
"Exchange rate management policy needs to balance build up of reserves and domestic liquidity on one hand and maintaining external competitiveness with low inflation and interest rates on the other," the survey said.
