PM Council lowers growth projection to 7.1%

NEW DELHI: Prime Minister Manmohan Singh's economic advisory council on Friday lowered its growth forecast for the economy in the current fiscal year ending March 2009 to 7.1% from its previous estimate of 7.7% and said fiscal deficit would balloon to 8% of the gross domestic product if subsidies are included.

However, the economy is likely to recover by the second half of fiscal 2009-10. "Indian economy is likely to remain relatively weak in the first quarter of the fiscal 2009-10 and slowly pick up thereafter. It is expected to show fairly strong recovery in growth in the second half of the fiscal. Growth rate is projected between 7%-7.5% or somewhere above that in 2009-10", EAC chairman Suresh Tendulkar told reporters.

The slowdown in the economy in fiscal year 2008-09 has been triggered by high commodity prices in the first half of the current fiscal and a deeper than expected recession in rich countries in the second half.

While growth next fiscal would be fuelled by lower borrowing costs, tax cuts and higher government spending, the sharp fall in global commodity prices would help bring down fiscal deficit, Mr Tendulkar said. This fiscal, the combined fiscal deficit of the centre and the state including off-budget items such as fertilizer and oil subsidy, would go upto 10% of the GDP or more, said Mr Tendulkar.

"In an exceptional year like this, the cost of sticking to fiscal deficit targets would be a deeper slow down. Sticking to targets under the Fiscal Responsibility Management Act is neither desirable nor feasible under current circumstances", he added.

The investment rate in the current fiscal would be lower than last year's--down to 35% from 37.4%--as companies face financing constraints and banks going slow on lending. The aggregate savings too would be lower at 33%, down from 36% last fiscal, the panel said.

To spur growth and stimulate consumer demand, the government had unveiled a second stimulus package on January 2 to inject capital into banks and increase infrastructure spending. RBI has slashed the benchmark repurchase rate by 350 basis points to 5.5% since October and the government has cut taxes and announced extra spending plans to buoy growth.