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Govt may revise down growth target

business Updated: Jul 04, 2011 01:57 IST
Gaurav Choudhury

Amid persistent high inflation and no signs of a let up, the government is likely to officially pare down the Indian economy's growth forecast for 2011-12 in the coming days, barely four months after the presentation of the Union budget.

A source who did not wish to be identified said the finance ministry is likely to present the revised growth targets early this week, articulating the reasons behind the revised projections given the prevailing macro-economic conditions.

India's GDP grew by a respectable 8.5% for 2010-11 as a whole, but the last quarter (January to March) saw a staggering industrial slowdown.

India's GDP grew 7.8% during in that quarter - the slowest in five quarters. The manufacturing sector also grew by slow 5.5% in the quarter, as rising interest rates hurt consumption and investment.

In the budget for 2011-12 presented in February, the government had assumed an average annual inflation of 5% during the year and a real GDP growth of 9%.

Both figures appear unlikely, with high food and commodity prices expected to keep inflation at elevated levels.

"India's growth rate in 2011-12 will be in the range of 8 to 8.5%," C Rangarajan, chairman of Prime Minister's Economic Advisory Council told HT.

"A growth rate above 8 % must be considered respectable and high in the current world situation," he felt.

Besides, the slew of tax cuts on petroleum products along with a moderate growth in tax collections from other avenues could upset the government's plan to prune the fiscal deficit to 4.6% of gross domestic product (GDP) this year from 5.1% last year.

An official who did not wish to be identified said: "Meeting the indirect tax revenue collection targets in 2011-12 will not be an easy task to accomplish after the restructuring of taxes in petroleum products."

Government sources indicated that a mid-course revision of revenue targets was possibile, as the finance ministry scrambles for options to tap new sources of revenue.

"We will have to see if any mid-course revision of tax and deficit target is required," an official said.

Inflation is set to surge to double-digit levels as the impact of costlier diesel and cooking fuel cascade through the broader economy, making most goods and services dearer.

The government last month raised diesel, kerosene prices and cooking gas prices by Rs 3 a litre, Rs 2 a litre and Rs 50 a cylinder respectively, a move that is bound to have a domino effect on most expenses, from transportat to food.

The hike in diesel prices alone will add 0.30 percentage points to the overall inflation rate that was 9.06% in May. Fuel, power and lighting carry a weight of 14.91% in the wholesale price index (WPI) - India's most followed inflation benchmark.

The central bank also raised the repo rate, the rate at which banks borrow from RBI, 10 times in the past 15 months as it attempted to take out liquidity from the system. With liquid cash unavailable, spending normally comes down, cooling prices. But this has not worked.

A slow fadout?