The final GDP estimate for 2008-09 is 7.1%, says the government?s top economic advisory body. Its prescription to revive growth is for RBI to lower key rates and additional government spending. The recommendation is significant, as RBI will release its third-quarter review of monetary policy on Tuesday.

The forecast by the Prime Minister?s Economic Advisory Council falls short of its 7.7% estimate made last July and comes a day after China lowered its own GDP estimate to 6.8%. Worryingly, investment is also expected to fall by 2.5 percentage points to 35% of GDP by the fiscal end due to financing constraints, a sharp slowdown in investor confidence and general business conditions, the economic review for 2008-09 noted.

?Growth in the second half (of 2008-09) is going to be much slower?maybe of the order of 6.5%,? EAC chairman Suresh D Tendulkar said, adding that the economy?s growth would recover smartly in the second half of next year. Various stimulus packages announced by the government, a relaxation in deficit targets for states and additional government borrowings would take the consolidated fiscal deficit of the Centre and states to more than 10% of GDP by year end, EAC said.

The panel slammed the reluctance by banks to lend, despite considerable easing of monetary policy. Tendulkar said there is a crisis of confidence that is not justified by objective circumstances?including a stable agriculture sector, comfortable external payments situation, resilient Indian enterprises, healthy bank balance sheets, strong and non-leveraged domestic consu- mption growth and dominant dependence on domestic savings for financing investment.

?There is irrationality in consumers not spending, investors putting plans on the backburner and banks not lending,? he said. EAC expects India?s growth to show a fairly strong recovery in the second half of 2009-10, by which time advanced economies are likely to come out of recession. ?Growth would remain relatively weak until the first quarter of the next fiscal and start picking up smartly thereafter,? the economic outlook said

The EAC review described the deficit level as ?uncomfortable?, but said the additional spending is both justified and feasible in the current circumstances and is unlikely to crowd out private investment. Inflation has been projected to fall to 4% by March 2009, while the current account deficit is pegged at a comfortable 1.9% of GDP. However, the fall in consumer price index-based inflation is expected to be less than wholesale price index-based inflation.

Growth is expected to moderate across sectors, including industry, services and manufacturing, except agriculture, which is largely insulated from the global financial crisis. The growth projection for industrial and manufacturing sectors this fiscal has been lowered significantly to 5.1% and 4%, respectively, from 7.5% and 7.2% earlier. The growth of services is pegged at 9.3%.