The finance ministry on Wednesday admitted that there is a need to revisit the growth outlook for the current financial year and said it would be around 8.6%, lower than the earlier projection of 9% plus expansion.
A ministry note, accessed by TOI, also said that inflation will remain persistently high between August and December and then start easing, but the impact of high global commodity prices will still keep it in the 6%- 7% range by March 2012.
The finance ministry has launched an image makeover exercise to dispel doubts about the strength of the economic expansion in Asia’s third-largest economy after a slew of data pointed to moderation in growth.
In the Economic Survey, a report card of the economy released ahead of the budget in February, the ministry had said the economy was expected to grow 9% (plus/minus 0.25) in 2011-12 based on the performance over the last five years and analysis of the trends of critical variables.
But the impact of stubbornly high inflation on growth as a result of the consistent interest rate tightening by the central bank seemed to have prompted the ministry to revisit its estimate. The RBI has said it is ready to sacrifice some short term growth to calm price pressures.
“Thus, we could see a cyclical slowing in the first two quarters (8.4%), before growth picks up in the last two quarters (8.8%). Overall, growth is estimated to be marginally higher at 8.6% this year over 2010-11 levels of 8.5%,” a finance ministry document said on Wednesday.
It said the signals on the demand and investment side were mixed and cautioned against making any generalization that the economy had entered a slowdown phase. “On the demand side, private consumption and exports are strong, but corporate investment is moderating. Here again the signals are mixed and given that demand numbers are subject to considerable revisions, any generalization need to be made with caution,” the ministry note said, adding that it expects foreign direct investments to pick up.
The RBI has raised interest rates 10 times in the past nearly 15 months to tame inflation, and is widely expected to again raise rates when it reviews monetary policy later this month. The impact of the rate increases has started kicking in as evident in slowdown of industrial and manufacturing growth and moderate car sales. Economists have also pared their growth estimates given the spate of data, which has pointed to a moderation in growth.
The ministry said the government and the RBI were closely monitoring the price situation closely and would like to bring inflation down to 6 to 6.5% in the year term. It did not specify the time frame. Inflation has emerged as a policy headache for the past two years and has remained stubbornly high and currently hovers around 9.44%. Some economists say that the inflation rate could hit double-digit for a brief period in the weeks ahead due to the sharp revisions in the inflation data for March and April.
The ministry also admitted that it would not be possible to sustain the scorching pace of growth in exports given the slowdown in the euro areas and overall slowdown in global trade volumes. This view matches with the consistent caution from the commerce ministry that exports growth will moderate in the months due to the weakness in the global economy and major markets for Indian goods.