New Delhi: India's economy may grow at the slowest pace in a decade in the current fiscal year, according to forecasts by the Finance Ministry, which predicts inflation will slow enough to allow interest-rate cuts. Asia's third-largest economy may expand about 5.7 per cent to 5.9 per cent in the year through March, less than an earlier estimate of as much as 7.85 per cent, the ministry said in a mid-year review presented in parliament. That would be the smallest gain since the year ended March 31, 2003, when gross domestic product grew 4 per cent.
The Reserve Bank of India, which decides on monetary policy today, has so far resisted calls from finance minister Palaniappan Chidambaram for lower rates, opting to keep the repurchase rate at 8 perc ent to damp inflation in October while reducing the cash reserve ratio. Stocks fell after the government cut its growth forecast, paring gains made in recent weeks as India stepped up efforts to push through a policy overhaul and attract foreign investors. "There is no doubt left that India is faced with a serious economic situation," said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi.
"The central bank might take the recent government measures more seriously and try to provide a more investor-friendly environment." To revive confidence in an economy with one of Asia's worst performing currencies this year, Prime Minister Manmohan Singh in recent months allowed more foreign investment in retail, curbed energy subsidies and set up a panel to accelerate infrastructure projects. He also approved changes to a century-old land law to help curb often violent protests that have stalled projects.
"Both fiscal and monetary policies, however, would need to be supportive to sustain investor confidence," the Finance Ministry said. A moderation in inflation that may commence in the January-to-March quarter and benign global commodity prices will "facilitate softening of the monetary policy stance of the RBI," it said. Inflation at the end of March will probably moderate to 6.8 to 7 per cent and the budget deficit will be contained at 5.3 per cent of GDP, the Finance Ministry said.
The central bank may keep its benchmark interest rate unchanged tomorrow, while reducing the reserve ratio for lenders, according to most economists surveyed. "The growth revision was expected and the central bank may like to see one or two more data points before loosening policy," said Kaushik Dani, a fund manager who helps manage $886 million in assets at Peerless Mutual Fund in Mumbai.