Prime Minister's key economic advisor C Rangarajan has lowered the growth forecast for the current financial year to 5.3 per cent and listed out a host of measures, including further liberalisation of FDI norms, to improve economic condition.
The PMEAC had in April projected 6.4 per cent growth for Indian economy for current financial year. The GDP grew by 5 per cent in 2012-13.
"Economy will grow at 5.3 per cent in 2013-14," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said while releasing the Economic Outlook for 2013-14.
The Reserve Bank of India (RBI), too, had earlier lowered its growth projection for this financial year to 5.5 per cent from 5.7 per cent.
In order to promote growth, Rangarajan suggested that the government should liberalise foreign direct investment (FDI) norms, resolve tax concerns of the industry, fast track public sector investment and initiate measures to contain fiscal deficit.
Referring to the external sector, Rangarajan expressed hope that the Current Account Deficit (CAD) in 2013-14 will come down to $70 billion or 3.8 per cent of GDP, from $88.2 billion or 4.8 per cent a year ago.
As regards rupee, he hoped "at the current level (it) is well corrected. Stability is returning to the foreign exchange market. As capital flows return and as CAD begins to fall, this tendency will strengthen".
However, he added the current stance of monetary policy should continue until stability in rupee is achieved.
The rupee has lost over 20 per cent since April and had touched a life time low of 68.86 to a dollar on August 28. It is currently trading at 63.78 to a dollar.
Talking about government's resolve to bring down fiscal deficit to 4.8 per cent of GDP in 2013-14, Rangarajan said "containing (it) within the budgeted estimate could be a challenge".
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The PMEAC expects the agriculture sector to grow by 4.8 per cent in the current fiscal up from 1.9 per cent while the industrial growth has been pegged at 2.7 per cent as against 2.1 per cent in 2012-13.
The growth of services sector, however, is projected to decelerate to 6.6 per cent in current fiscal from 7.1 per cent a year ago.
Admitting that rupee depreciation will put some pressure on inflation, Rangarajan said: "On balance, WPI inflation by end March 2014 will be around 5.5 per cent as against the average of 7.4% in 2012-13 and 5.7 per cent for March end 2013".
The wholesale and retail inflation widened in recent months primarily on account of higher weightage of food items in CPI. The retail inflation in August stood at 9.52 per cent while the WPI numbers in July was at 5.79 per cent.
Rangarajan said monetary policy had to tackle high inflation in last three years and it may switch to monetary easing with further moderation in inflation. However, much of the monetary easing would depend on developments in the forex market, he said, adding "controlling CAD remains the main concern at present".
The trade deficit, PMEAC said, would come down to around $185 billion in 2013-14, against an estimated $195.7 billion in 2012-13. Between 2010-11 and 2012-13, the combined impact of higher net oil and net gold imports on the CAD was almost $57 billion or 3 per cent of GDP.
The CAD may go even below $70 billion in 2013-14 if the recent trends in exports and imports are maintained through the year, PMEAC said.
Net Capital flows are projected to fall to $61.4 billion in 2013-14 against an estimated $89.4 billion in 2012-13 putting pressure on the country's forex reserves.
"There may be a draw down of $9 billion from reserves against accretion of 3.2 billion in last fiscal," Rangarajan said. India's forex reserves stands at around $280 billion.
"For India, the short-term problem is of financing the large CAD, while the medium term issue is to compress CAD to a more sustainable level of around 2.5 per cent of GDP and ensure price stability," he said. .