In a 117-page mid-year review of the Indian economy, the finance ministry describes its view on the short-term as one of cautious optimism. But the subtext of this report, which was presented to Parliament on Tuesday, offers some clues about the extent of the slowdown that the economy could run into in the months ahead.

Jayachandran / Mint

The mid-year report card warns: “…we should be prepared for growth in 2008-09 as a whole to be around 7%." That implicitly means the economy will grow at 6.2% in the second half of the current fiscal year. In other words, India is moving towards its most sluggish quarters since the end of 2003.

The debate on the extent of the global recession and its impact on India is far from settled. International Monetary Fund first managing director John Lipsky said in a 10 December speech he gave in Frankfurt that the multilateral agency’s forecast of global growth would be cut further in January. The finance ministry is quite correct to point to the bright side of things—a rising savings rate, dependence on domestic consumer and investment spending, and a high share of services in the economy. But the dark side that continues to worry are the especially high fiscal and current account deficits.

The finance ministry is unlikely to accept these clear and present dangers to India’s economic stability. That would amount to admitting that record tax collections during the boom were myopically frittered away. But the ministry has once again implicitly admitted that there is not enough fiscal space for a huge burst of government spending to support aggregate demand, even as there are expectations of a new fiscal package in the next couple of weeks.

Public finances do not present a pretty picture. That is perhaps why monetary policy may be expected to bear the bigger burden in the days ahead. Both the mid-year review and statements from government officials support the view. The sharp drop in wholesale price inflation allows the Reserve Bank of India to cut interest rates more aggressively now. That is where the action should be.

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