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New Delhi: India’s economy is expected to grow at 4.9% in the fiscal year ending 31 March against 4.5% a year earlier, the Central Statistics Office (CSO) said on Friday.

The size of the economy now stands at $1.8 trillion in 2013-14 at the rupee’s Friday value of 62.29 against the dollar.

However, the higher headline number came on the back of a lower base, since CSO last week revised the 2012-13 growth estimate downwards to 4.5% from 5% estimated earlier, implicitly showing that there is no significant improvement in economic activities during the current year.

If the latest projection by CSO holds good, then during the second term of the United Progressive Alliance, the economy would grow at 6.72%, compared with 8.42% during its first term.

While gross domestic product (GDP) growth is expected to be driven by better farm output, which is projected to grow at 4.6% against 1.4% a year ago, manufacturing is expected to contract 0.2% for the first time since 1991-92, when it shrank by 2.4%. Clearly, India’s economy is in the midst of the sharpest downturn in a decade.

High cost of borrowing and delays in securing mandatory government approvals have stalled corporate investments and squeezed cash flow, while high inflation and slower hiring have shaken consumer confidence and forced households to cut consumption expenditure.

The investment rate as measured by gross fixed capital formation also slowed down to 28.46% of GDP compared with 30.37% a year ago.

CSO expects the economy to grow at 5.2% in the second half (October-March) of the current fiscal year since GDP expanded at 4.6% in the first half (April-September).

Crisil Ltd chief economist D.K. Joshi said the economy would have grown at only 4.4% in 2013-14 had last year’s GDP growth rate not been revised downwards. “The economy is weaker than what was previously assumed. The weakness is more prominent in mining and manufacturing sectors," he added.

Mining production is also expected to contract for the second consecutive year by 1.9%, against 2.2% a year ago.

Madan Sabnavis, chief economist at CARE Ratings, said that with the government’s attention in the current fiscal year focused entirely on curbing fiscal deficit, current account deficit and inflation, the task of reviving growth has been ignored. “The GDP growth suggests that the economy is stagnating. There is no convincing recovery reflected in the data. The biggest challenge for the next government will be reviving manufacturing for overall growth to pick up," he added.

Joshi said there could be a downward risk for the GDP estimate if the government drastically reduces its expenditure in the fourth quarter of the fiscal year to keep the fiscal deficit under the target of 4.8% of GDP. “However, possible upward revision of manufacturing, once the Annual Survey of Industries data comes in, may keep the GDP growth rate at its current level," he added.

Community services, which represent both Union and state government expenditure, are estimated to expand at 7.4% against 5.3% a year ago. However, the data only captures government expenditure till the third quarter of the fiscal year, while most spending cuts are actually carried out in the fourth quarter (January-March).

Sabnavis said the construction sector, which is expected to grow at a meagre 1.7% over a lower base of 1.1% a year ago, reflected a significant cut in capital expenditure by the government to meet the fiscal deficit target.

The government has exhausted 95.2% of the fiscal deficit target in the first three quarters (April-December) of the current fiscal year, against 78.8% during the same period a year ago. It has set itself a fiscal deficit target of 4.8% of GDP for 2013-14 and finance minister P. Chidambaram has promised not to breach the “red line".

The Reserve Bank of India (RBI), in its macroeconomic outlook released last month, said growth in the second half of 2013-14 may turn out to be marginally higher than in the first half, mainly due to a rebound in farm output and better exports.

“However, industrial growth continues to stagnate and leading indicators of the services sector exhibit a mixed picture. Clear signs of a pick-up are yet to emerge, though a modest recovery is likely to shape up in 2014-15. Durable recovery remains contingent on addressing persistent inflation, and the bottlenecks facing the mining and infrastructure sectors," it added.

There is, however, near consensus on a significant pickup in growth in 2014-15. The International Monetary Fund (IMF) and the World Bank have projected economic growth to pick up to 5.4% and 6.2%, respectively, for 2014-15.

In its update to the World Economic Outlook, IMF on Tuesday said India’s growth had picked up in 2013-14 after a favourable monsoon and higher export growth. It said economic growth is expected to accelerate further on stronger structural policies supporting investment.

RBI expects growth to pick up at around 5.5% in 2014-15 after falling below 5% in 2013-14.

“A moderate paced recovery is likely to take shape in the next year with support from rural demand, a pick-up in exports and some turnaround in investment demand. The growth in 2014-15 is likely to be in the range of 5-6%, with likelihood of it being in higher reaches of this forecast range as project clearances translate into investment, global growth outlook improves, and inflation softens," RBI had said in its policy review.

Joshi of Crisil said that for growth to recover to 6% in fiscal year 2014-15, the monsoon should be normal, the world economy needs to improve as widely expected, and there should be some improvement in investment and mining segments as well.

Sabnavis of CARE Ratings said projections of any recovery in the next fiscal year are based on assumptions, including more clarity in government policies, lower inflation, which could lead to a virtuous cycle of lower interest rates, and a revival in manufacturing.

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