The World Bank (WB) on Wednesday slashed its forecast for the growth rate of the Indian economy to 6.5 per cent for 2012 from 8.4 per cent estimated in June because of the worsening global economic scenario .
"The weakening in activity (in India) reflects a significant moderation in domestic demand, led by a deceleration in investment activity that has faced headwinds of rising borrowing costs, high input prices, slowing global growth and heightened uncertainty," the report Global Economic Prospects 2012 said. The report also said that India's policy paralysis has contributed to the slowdown in growth .
"Delays and uncertainty surrounding the implementation of policy reforms have also hindered investment," it states. According to the report, household spending has been curbed by persistently rising prices cutting into real incomes and higher borrowing costs.
"A tightening of monetary policy and some reduction in the fiscal deficit contributed to the slowdown," the report states. The World Bank has also lowered its global economic growth forecast for 2012 to 2.5 per cent and warned of another global recession.
"The world could be thrown into a recession as large or even larger than that of 2008-09," the report said. The World Bank warned that, while contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains.
"An escalation of the crisis would spare no one. Developed and developing country growth rates could fall by as much or more than in 2008-09. Developing countries should hope for the best and plan for the worst," the report warned. The report also says that the developing countries would also have much less fiscal space than in 2008 with which to react to a global slowdown as 38 per cent of developing countries are estimated to have a government deficit of four per cent or more of GDP in 2011.
As a result, if financial conditions deteriorate, many of these countries could be forced to cut spending pro-cyclically, thereby exacerbating the cycle." Accepting the global uncertainty, finance minister Pranab Mukherjee also said that India's economic growth will fall below 7.5 per cent in the current financial year and admitted that the fiscal deficit target of 4.6 per cent of GDP would not be achieved.
"Performance during the first half on the fiscal front poses some risks in both receipts as well as expenditure estimates. Therefore, adhering to the fiscal deficit target of 4.6 per cent of GDP in 2011-12 will be a major challenge," "We have a difficult last quarter ahead of us in this fiscal year.
Our growth for 2011-12 may be around 7.5 per cent or less," Mukherjee said while addressing the 84th annual general meeting of the Federation of Indian Chamber of Commerce and Industry (FICCI) in New Delhi. Conceding that the situation has not changed much during the past one year, the minister said that he would have to address the slippages in economic parameters in the forthcoming budget.
"As I set about preparing the Union Budget for the next year, I have to take stock of the developments in the past months and find ways to address the slippages and build on outcomes that need to be consolidated in the ensuing years, he said. Mukherjee also conceded that the government could not push through some key policy reforms due to divergence of political opinion in Parliament.
Important pending measures include Goods and Services Tax, Direct Tax Code and liberalising foreign direct investment (FDI) norms.
Courtesy: Mail Today