India's 2012/13 GDP Estimate Lowered to 5 Percent

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February 7, 2013 5:00 PM EST

India's slowest growth in a decade could be worse than anticipated, as preliminary data released on Thursday showed the economy set to have grown 5.0 percent in fiscal year ending next month, underscoring the urgent need for reforms to boost growth.

The central bank's forecast for the year had been 5.5 percent, while Finance Minister P. Chidambaram had projected growth of 5.9 percent, but both appear to have been over-optimisic.

"Five percent GDP growth for the full year is more in tune with reality. The industrial sector downturn has extended beyond anyone's expectation," said Rupa Rege Nitsure, chief economist, Bank of Baroda, Mumbai.

The data will pile pressure on Prime Minister Manmohan Singh's Congress-led government to unveil a growth-oriented budget on February 28 for the next fiscal year, beginning in April.

Unfortunately for Singh, with a national election looming in 2014, his government can ill-afford to indulge in populist schemes and expensive projects that would handicap efforts to lower a fiscal deficit targeted at 5.3 percent of GDP this year.

The government's advance estimate for the fiscal year 2012/13 shows that farm output is expected to grow 1.8 percent, while the manufacturing sector is likely to grow 1.9 percent.

According to Thursday's data, capital investment is expected to slow down to an annual 2.48 percent in 2012/13 from 4.39 percent in the previous year

Structural bottlenecks have restricted India's growth potential to around 7 percent, according to the central bank, ruining the aspirations India has for near double-digit expansion needed to provide jobs for a burgeoning population.

Business leaders and economists have called on the government to make it easier for firms to acquire land for new projects and carry out tax reforms to boost economic growth that has been stuck around 5.5 percent for the past three quarters.

Road, power and mining projects worth billions of dollars have been held up for years because of delays in getting multiple regulatory clearances.

To help revive the economy and spur investments, the Reserve Bank of India (RBI) last month cut interest rates for the first time in nine months, trimming the repo rate by 25 basis points.

But the RBI also warned that while halting the slide in economic growth was a priority it had limited room for further easing unless inflation and a high current account deficit improved by more than expected.

The slowdown has hit government revenues, leaving New Delhi scrambling for ways to cut its fiscal deficit to avert a downgrade in its sovereign credit rating to junk bond status.

Forced to tighten belts, Finance Minister Chidambaram has targeted spending cuts in welfare, defence and road projects for his upcoming budget.

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