On demand spur, Rangarajan sees FY11 growth at 7-8%

Higher domestic demand could see the growth rise to 7-8% in the next fiscal year, 2010-11, said Mr C Rangarajan, who took over as the chairman of prime minister���s top economic advisory council for a second term last week.

However, only a recovery in exports will see the economy returning to 9% growth, which is possible if developed countries are able to come out of recession, he said. Exports account for about a fifth of the total economic output of the country.

Mr Rangarajan���s forecast of the country���s economic growth has factored in the poor monsoon rains. Though he did
not see agriculture���which accounts for 18-20% of the economy���impacting the overall growth significantly, he felt that distress in the drought-hit districts will be severe.

Two hundred forty-six districts of the 626 districts have been declared drought-hit. The general impression is that the recession has bottomed out but the recovery will be slow, Mr Rangarajan told a gathering of CEOs at ET���s Power Breakfast with finance minister Pranab Mukherjee.

The finance minister said that mitigating the impact of deficient monsoon was a priority for the government. Despite difficulties in agriculture and export markets, the country would grow by over 6%, he said.

The answer to unbridled financial innovation that brought the Western financial markets to their knees was not putting a lid on innovation in financial markets altogether, Mr Rangarajan said. The country needs new products, but innovation should not become too complex to fathom where risks lie.

���Regulators should achieve a balance between promoting innovation and regulation in the sector to achieve a sound financial system,��� he said. Financial regulators such as Sebi and RBI are in the process of introducing new products and providing depth to the fledgling corporate bonds market that would fund infrastructure projects.

On the shortfall in power generation, Mr Rangarajan said that the authorities needed to raise power output to provide impetus to growth. ���It���s extremely important that power generation should match the rate of growth in the economy,��� Mr Rangarajan said.

The 50,000 mw target seems a stiff one considering that the country has added only about 20,000 mw capacity in the three years to 2008-09.

Emphasising on the need for adequate power to fire up economic growth, which dropped to 6.7% in the last fiscal year from 9% or more in the preceding three years, he said, ���China is adding power generating capacity each year that we achieve in five years.���

Electricity generation growth has generally lagged the nominal GDP growth, suggesting that businesses were relying on off-grid captive power. The growth in power generation by power utilities in 2008-09 was only 2.7%.

Mr Rangarajan said that considering the slow pace in building power production capacity, the country needed to add additional 50,000 mw capacity in the last two years of the Eleventh Five Year Plan ending 2011-12. The authorities should improve the availability of coal for the thermal power plants to achieve the target, he argued.

Leading economists have stressed on the need to reform the coal sector to address the shortage of fuel. The Economic Survey of 2009-10 had highlighted this point, saying that private entry into coal mining was needed to reverse the substitution of domestic coal by imported oil and coal.