The government on Tuesday indicated 'aggressive' easing of interest rates and 'fast-tracking' reforms to offset the impact of global turmoil on the growth which is expected to moderate to around 7 per cent this fiscal besides inflation returning to 'normal levels' by March.
The Mid-Year Review of the Indian Economy presented to Parliament said, "there is a considerable scope for monetary policy easing over the next six to 12 months to offset the global increase in demand for money that is being transmitted to India. . .
"An aggressive monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing," the review said.
Following cuts in the policy rates by the Reserve Bank of India, several banks have already reduced their lending rates giving relief to the hard-pressed borrowers, especially in the sectors including housing, exports, small and medium enterprises.
Through a slew of measures, the central bank has injected about Rs 3 lakh crore (Rs 3 trillion) into the cash-strapped system.
Preparing the country for a 'significantly' slower growth in the second half of the fiscal, the review projected economic expansion at around seven per cent for the year.
It attributed the moderation in growth from 9 per cent in the previous fiscal to crisis in the industrialised countries affecting India's external sector including exports and capital flows.
On the positive side, the review said the decline in commodity and fuel prices will help bring the inflation to 'normal' levels by March 2007. From a peak of 12.91 per cent in August, the inflation has come down to 6.84 per cent in early December.
Having introduced the insurance reforms bills, pending for four years, the government wants to 'fast-track' the pending agenda to revert to 8.5 to 9 per cent growth.
Inflation to be at 4%-5% by March-end
Inflation, now on the decline, could head further southwards to hover in the range of 4-5 per cent by end-this fiscal, a top economist said on Tuesday.
"Inflation is expected to decline to around 4-5 per cent by end-this fiscal," the Prime Minister's Economic Advisory Council's chairman, Suresh Tendulkar, told reporters on the sidelines of a conference in New Delhi.
Inflation has dipped to 6.84 per cent for the week ended December 6, the lowest in nine months.
With inflation now not likely to prove a major headache, it is widely expected that the apex bank would effect rate hikes to give a boost to the growth momentum.
"A 1 per cent cut in both the repo and reverse repo rates is desirable," Tendulkar said.
Public sector banks have already begun slashing their prime lending rates while those in the private sector space have so far refrained from doing so.
"Private sector banks will (now) have to reduce their rates," Tendulkar said. According to him, presently banks were unwilling to lend though they were well-capitalised.
"Banks are well-capitalised but the current problem is that they are unwilling to lend," he said.