India GDP Pegged at 6.1-6.7% in FY14; Has the Economy Bottomed Out?

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By R. Chandrasekaran | February 28, 2013 4:18 PM EST

The Indian government has set an ambitious gross domestic product growth rate of 6.1-6.7 percent for the upcoming fiscal year 2013-14. This is higher than the most recent government's downward revision to 5 percent for the year 2012-13. The growth pace is probably the slowest in a decade. Does this mean that the economy has bottomed out or is the government fixing a higher rate as in the past only to reduce it later?

The finance ministry blamed the slower growth in the current fiscal to sluggish expansion seen in industry, agriculture and services. Last year too, the government had set an ambitious target of 7.3 percent, but later reduced it to 6.5 percent in July and to 5.8 percent in October. This has been further reduced to around 5 percent going by the reply of Minister of State for Finance Namo Narain Meena in the Lok Sabha very recently.

On Wednesday, an economic survey was tabled in the Parliament predicting the economy to grow between 6.1 percent and 6.7 percent in the next fiscal. The Federation of Indian Chambers of Commerce and Industry or FICCI believes that the economy has bottomed out. Its president Naina Lal Kidwai, said, "Green shoots certainly seem to be on the horizon and the closely tracked PMI number also shows an uptick in the last few months."

However, the trade body has cautioned that the growth indicated by the government could be achieved only if the economic reforms are continued. The government has made known its intention of introducing the goods and services tax this time. The FICCI president wanted the government to arrive at a consensus on this tax reform since this could add approximately up to 2 percent to India's GDP growth.

The economy survey targets inflation to fall between 6.2 percent and 6.6 percent by March this year setting the stage for the Reserve Bank of India to announce further cuts in interest rates. To bump up economy, the FICCI stated that its recent surveys highlighted the need for a rate cut of up to 75 basis points. The trade association felt that inflationary pressure was largely attributed to supply side factors and wanted greater effectiveness in marketing and distribution of food items while improving farm productivity.

Another area where the government's attention invited was the deterioration of incremental capital output ratio due to lower productivity of invested capital in the economy. The trend needs to be reversed and FICCI suggested expedition of clearances by the Cabinet Committee on Investments for projects that are stuck in different parts of the country and ensure projects implementation.

The government's recent decision to gradually decontrol diesel prices came in for appreciation from the trade association as this is a step in the right direction in controlling fiscal deficit.

The FICCI welcomed the economic survey's call for a widening of tax base rather than burdening more on the existing set of tax payers.

The spurt in gold import has widened the current account deficit, which has become a big challenge for the economy. The trade association's president concluded by saying, "FICCI has been reiterating the need to promote financial savings vis-à-vis investments in gold and hopes that in the forthcoming budget some measures would be introduced to this effect. Further, overtime we have seen certain policy moves have been made to attract greater FII flows into the country particularly into debt securities. This is a step in the right direction to encourage funds flow into the country." (Global India Newswire /AmericanBazaarOnline.com)

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