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Infrastructure snag worries Govt

Govt adopts cautious optimism on economy, Gaurav Choudhury reports.

india Updated: Dec 19, 2006 21:28 IST

While the economy is booming with a handsome 9.1 per cent growth in the first half of the current fiscal year, two "I"s, infrastructure and inflation, are key worries, the government said on Tuesday in a mid-term report card that sketched a cautiously optimistic picture.

In a symbolism of how overall strength can be negated by a single weakness, the government termed infrastructure as the "Achilles' heel" of the Indian economy, and called for reducing unproductive "revenue" expenditure that creates no assets in order to shore up public investment to build infrastructure.

In a mild tone that hinted at a call to help firms to easily recruit or reduce workers, the review said there was a need for "a review of the flexibility or lack thereof in the current labour legislations."

While India's economy is increasingly compared with that of China, the neighbour's ports, roads and power plants are a matter of envy.

"Weak infrastructure continues to be the Achilles' heel of the Indian economy… Fiscal space needs to be created by cutting down revenue expenditure including subsidies to enhance public investment in specified infrastructure where cost recovery is not possible," the Finance Ministry observed in the Mid-Year Review tabled in Parliament.

The report observed that buoyed by strong manufacturing growth, India's gross domestic product (GDP) grew by 9.1 per cent during the first half of the current financial year with industry growing by 10.9 per cent.

But the review took note of "some inflationary pressures" with the inflation rate based on wholesale prices reaching a peak of 5.5 percent in mid-June. The rate declined to 5.16 percent in the week ended December 2 from 5.45 percent two weeks earlier, as the government cut petrol and diesel prices. However, Indian fuel prices still remain much below global levels, as the government has not passed on the increase to the public.

Though a combination of high economic growth and creeping inflation in manufactured products had generated some concerns, there was no cause for alarm in regard to crucial factors, the review said.

Finance Minister P Chidambaram told reporters that the government would take pre-emptive action to contain rising prices.

"We have to be ahead of developments and take pre-emptive action, rather than fall back and take corrective action," he said, adding it was too early to say whether inflationary expectations had come down.

Inflation was due to supply side constraints, besides a rapid rise in credit growth and money supply, he said. Supply side constraints refer to a shortage of goods or services to meet growing demand.

The services sector clocked a growth rate of 10.7 per cent in the April-September period, with telecommunications being a key driver. Telecoms grew 27.1 percent a year on an average between 2000 and 2005, the review said.

Finance Ministry officials, concerned over pressures on interest rates, inflation and fuel prices, underlined the need to maintain macroeconomic stability, particularly in the context of global imbalances and uncertain currency markets.

"Indeed there is a need for continuous caution in maintaining macroeconomic stability to support the pick-up in investment and growth on an enduring basis. This is particularly so in the current juncture with large global macroeconomic imbalances and uncertainty in currency markets," it said.

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First Published: Dec 19, 2006 20:59 IST