Mid-Year Economic Review sees India’s GDP growth at around 5.5 per cent

If the forecast materialises, it would mark an improvement from two successive years of below 5 per cent economic growth in India.

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India’s GDP is expected to rise to 5.5 per cent in the current fiscal from 4.7 per cent last year on back of improving macro-economic situation, says the Finance Ministry’s Mid-Year economic review which also flagged fiscal challenges like subdued revenue collections. (Read Full FinMin Report)

The review projected that 7-8 per cent economic growth was “within reach” in the coming years and said inflation has fallen dramatically and that declining oil prices will help in containing CAD at around 2 per cent of GDP.

The ‘Mid-Year Economic Analysis 2014-15’ tabled in Parliament also assumed that the Reserve Bank would maintain status-quo in the interest rate till March 2015 and a stable outlook for rupee. Industry has been demanding cut in interest rate amid slowing industrial production.

“Investment is yet to pick up significantly. But on the upside inflation has come down dramatically…The year (2014-15) could end with growth around 5.5 per cent,” it said.

The GDP growth was sub-five per cent in the past two financial years.

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The review, however painted a rosy growth prospect in the medium term saying “the trend rate of growth of about 7-8 per cent should be within reach. With basic ‘public good’ provision and investment tapping into cheap labour, India can easily get closer to its growth frontier laying a strong foundation for the long-run”.

The review expects the retail inflation (CPI) to be in the range of 5.1-5.8 per cent in the next five quarters.

Referring to fiscal challenges, the review said “the tax base was weaker than expected thanks to unanticipated moderation in inflation” and the revenue projections were “over-optimistic”.

“The budget was unduly burdened by a legacy of carried over expenditure,” it added.

The review further said there are the usual headwinds from the external sector, but at the current conjuncture the gradual reversion to normal monetary policy in the US is “less of a threat to India given the improved macroeconomic situation” and other factors.

As per the report, there are stalled projects to the tune of Rs 18 lakh (about 13 per cent of GDP) of which an estimated 60 per cent are in infrastructure.

“In turn, this reflects low and declining corporate profitability…The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 per cent of total assets,” it said.

It further said that “displaying risk aversion,” the banking sector is increasingly unable and unwilling to lend to the real estate sector.

On the way forward for growth, it said first, the backlog of stalled projects needs to be cleared more expeditiously, “a process that has already begun”.

The review said that going forward, there is a great reason for hope because in addition to important reforms such as liberalising FDI in insurance, “two game-changing” reforms are on the horizon.

These are, the increasing use of direct transfers (combining Aadhaar with Pradhan Mantri Jan Dhan Yojna), and the Goods and Services Tax (GST).

“In sum, there is growing ground for hope but narrowing room for complacency,” the report said.

It further said despite the sprouting of green shoots, a robust recovery has still to fully take hold.

It also said that declining commodity prices, especially of oil, have driven inflation down. Oil prices have declined about 40 per cent this year. Oil and petroleum accounts for about 37 per cent of imports and 9 per cent of GDP. (Read Mid-Year Economic Review released in February 2014)

MID-YEAR ECONOMIC REVIEW: HIGHLIGHTS

* GDP growth in India will be around 5.5 per cent in current fiscal: Mid-Year Economic Review

*  Govt feels interest rates to remain unchanged till March 2015

* Investment is yet to pick up significantly, but inflation has come down dramatically

* Retail inflation to be in range of 5.1-5.8 per cent in next five quarters: Mid-Year Economic Review

* Game changing reforms of increasing direct benefit transfer and GST roll out are on horizon: Mid-Term Economic Review

* Mid-Year Economic Review pegs CAD at around 2 per cent with slump in oil prices offsetting higher gold imports

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