New Delhi: Notwithstanding a spate of grim economic data, the government has optimistically forecast that not only will inflation moderate, but economic growth will accelerate to 6% in the last two quarters of the current fiscal year.

Significantly, a day before the mid-quarter monetary policy review by the Reserve Bank of India (RBI), it also signalled that the central bank should consider a policy rate cut.

While acknowledging the slow growth trends in the first half (H1) of the current fiscal, the mid-year review of the Indian economy claims: “There are, however, reasons to believe that the slowdown has bottomed out and the economy is headed towards higher growth in the second half (H2) of 2012-13."

The report, which was presented in Parliament, follows a slowdown in economic growth to 5.3% in the quarter ended September from 5.5% in the preceding three months. Inflation is still above RBI’s comfort zone, while the elevated cost of money has forced companies to hold back on investments.

However, the review reasoned that a positive upturn in the Business Expectation Index in the October-December quarter, a higher Purchasing Managers’ Index in November, buoyancy in the capital market, improved internal accruals of the corporate sector in July-September and a resurgence of growth in the manufacturing sector suggest that the economy is poised for a moderate acceleration in H2.

It, therefore, concludes that the overall growth of gross domestic product (GDP) would be 5.7-5.9% for 2012-13, implying growth in H2 of the fiscal will be in the range of 6-6.4%. In H1 (April-September), growth averaged 5.4%. The economy grew 6.5% in the last fiscal.

However, to achieve higher H2 growth, both fiscal and monetary policies would need to be supportive to sustain investor confidence, and the government has to address concerns relating to structural supply-side bottlenecks, the review said.

The mid-term review rejected the optimistic growth projection of 7.6% made at the beginning of the year by then finance minister Pranab Mukherjee.

Chief economic adviser in the finance ministry, Raghuram Rajan, said there were some signs of an upsurge in the economy, but emphasized the need for more measures to boost the economy. “Further steps include a good confidence-inducing budget, speeding up clearance of projects in the cabinet committee, and further steps in capital market reforms," he added. Rajan, however, said the global economic climate continues to be fragile, with the US grappling with its fiscal cliff problem and uncertainties surrounding the euro zone.

Kunal Kumar Kundu, senior economist and general manager (India) at economic research and analysis firm Roubini Global Economics, said that although he agreed with the finance ministry that the economy may have bottomed out, a revival on the lines it outlined is very unlikely.

“The external economy remains uncertain and demand is yet to pick up. A more realistic growth target for the current fiscal would be 5.5%," he said.

Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, said that although a revival in H2 was certain, the extent of the revival was open to debate. “Our growth projection for the current fiscal is 5.6%. With a slightly better performance in the agriculture sector, a moderate recovery in manufacturing and some support from the external economy, 5.7% growth could be possible," he said.

In its prognosis of the sharp deceleration in growth, the mid-term review blamed it on deteriorating global conditions, bottlenecks in implementing projects domestically, a poor monsoon, and the tight monetary policy pursued by RBI that has kept the cost of borrowing at “elevated levels".

Chairman of the Prime Minister’s economic advisory council C. Rangarajan, speaking on the sidelines of another event on Monday, said economic growth in the current fiscal would be in the range of 5.5-6%.

The review projected headline inflation as measured by the Wholesale Price Index to moderate to 6.8-7% by end-March.

It hoped that a further moderation in inflation, together with benign global commodity prices, would create the conditions needed for RBI to soften its monetary stance. In November, headline inflation slowed to 7.24% from 7.45% in October, while retail inflation in the same month accelerated to 9.9% from 9.75% in October.

Blaming higher gold imports for the high current account deficit at 4.2% of GDP in 2011-12, the review said new gold-backed financial instruments were being considered to reduce the attraction of bullion for investors.

Signalling fresh policy changes, the review said notes on the Public Debt Management Agency of India Bill, 2012, and one to create a financial holding company to meet capital requirements of public sector banks will be moved to the cabinet soon.

Rajan said the government is looking to strengthen financial infrastructure and to improve the corporate bond market. Measures “we need to take including the vibrancy of equity market, ability of equity market to finance infrastructure requirement needs to be looked at", he said.

The review foresees achieving the direct tax revenue target of 5.3 trillion on the anticipation of a revival in economic activity in H2 of the fiscal. However, it concedes that the non-tax revenue target may be missed given the tepid response to the auction of 2G spectrum and achieving the target of raising 30,000 crore from divestment in state-run firms would be a challenge.

Liz Mathew and Kirthi V. Rao contributed to this story.

Close