FY13 GDP growth pegged at decade-low of 5.7-5.9%

FinMin expresses commitment to reining in fiscal deficit for the year at 5.3% of GDP

A day before the Reserve Bank of India (RBI)’s mid-quarter review of its monetary policy, the finance ministry today expressed its expectation of a “supportive” policy to help the economy grow at 5.7-5.9 per cent in 2012-13.

Though this growth estimate is significantly lower than the 7.6 per cent originally pegged in the Economic Survey, it would require the economy to expand by 5.9-6.3 per cent in the second half of the financial year, against 5.4 per cent seen in the first.

Even as RBI is expected to keep the repo rate unchanged at eight per cent in view of the inflationary pressure, the mid-year economic analysis, tabled in Parliament today, has pegged the Wholesale Price Index-based inflation rate to ease to 6.8-7 per cent by March, as against RBI’s projection of 7.5 per cent.

HIGHLIGHTS OF THE MID-YEAR ECONOMIC ANALYSIS

Aided by better growth in the second half of the year, economy to grow at 5.7-5.9% in 2012-13

Fiscal deficit likely to be 5.3%, though target challenging due to higher subsidy requirement

Inflation to moderate in January-March quarter; seen at 6.8-7% by March-end

Slippage in corporation tax,excise & Custom duty; service tax, income tax may exceed target

2G proceeds to be much lower than the targeted Rs 40,000 cr; Rs 30,000-cr divestment target tough to meet

Gold-linked savings schemes and bonds linked to real returns being considered

Prices of commodities need to be brought up to international levels to limit imports

Current account deficit likely to be lower than that last financial year; trade deficit to be higher

“...It should be possible for the economy to achieve an overall growth rate of 5.7 to 5.9 per cent for 2012-13. This would imply the rate for the second half would be close to six per cent. To achieve this, both fiscal and monetary policies, however, need to be supportive,” the analysis said.

On its part, the finance ministry expressed its commitment to reining in the Centre’s fiscal deficit for the year at 5.3 per cent of GDP, though it agreed it would be tough, given that the proceeds from spectrum sale and divestment were likely to be much lower than the Budget estimate of Rs 40,000 crore and Rs 30,000 crore, respectively. Also, there could be slippages in collections of corporation tax, excise duty, Customs duty, even as the overall subsidy burden would increase. It added a good Budget was needed to further boost growth.

The analysis acknowledged RBI’s view that a reduction in policy rates presently could stoke inflation rather than support growth. It, however said some recent government measures gave RBI the legroom for a more accommodative monetary policy.

It added that high interest rates affected output growth in sectors like capital goods & consumer durables.

In its October review, RBI had kept the repo rate unchanged, despite the finance minister announcing a five-year fiscal consolidation plan. This time, too, most economists expect the central bank to ease only banks’ cash reserve ratio.

Asked about monetary easing, Chief Economic Advisor Raghuram Rajan said: “You will know from RBI’s credit policy tomorrow. We have entrusted the central bank to look at the monetary side; let it do its job.”

The finance ministry’s document said: “A further moderation in inflation, likely to commence from the fourth quarter of the current year, together with benign global commodity prices, will facilitate softening of RBI’s monetary policy stance.”

It, however, also pointed out the growth-inflation trade-off needed a revisit, especially with the global economic and financial condition continuing to be weak.

In the first eight months of the financial year, the country’s trade deficit widened to $129.5 billion from $122.6 billion in the same period last year. The analysis agreed the trade deficit for the full year was likely to be higher than last year, but it clarified the gap would not be significantly wide, keeping the current account deficit (CAD) at a rate lower than the 4.2 per cent of GDP last year.

To rein in CAD, the government was considering gold-linked savings schemes, besides bonds linked to real returns, the analysis said. Also, the prices of commodities could be brought in line with global rates to limit imports. Gold imports, coupled with oil imports, had played a key role in widening CAD in 2011-12.