The Reserve Bank of India said on Monday that economic growth could moderate significantly due to a drop in domestic demand, the global economic slowdown and deterioration in global financial markets.
In its quarterly report ahead of the monetary policy review on Tuesday, RBI added that the risks to inflation had come down significantly due to the softening in international food and oil prices.
A survey of professional forecasters conducted by the central bank in December showed that gross domestic product growth could drop to 6.8 per cent during the current financial year, after clocking 9 per cent or more during the last three years.
This is lower even than the forecast of 7.1 per cent announced by the Prime Minister's Economic Advisory Council last Friday.
This would be the first year since 2002-03 that the economy would grow at less than 7 per cent.
The outlook for 2009-10 was not too good either with the median from a survey of professional forecasters estimating GDP growth at 6.3 per cent.
Various agencies have forecast that the Indian economy would grow between 6.3 per cent and 8 per cent this year, with the Confederation of Indian Industry putting out the most optimistic outlook of over 8 per cent, while the World Bank was at the other end of the spectrum.
A sharp decline in growth in the industrial sector and a deceleration in services, particularly transport and communications, trade, hotels and restaurants, are expected to adversely affect economic growth this year. RBI said that industrial activity, especially in manufacturing and infrastructure, was decelerating.
Though global commodity prices have declined in recent months, higher input costs and lower demand are expected to affect profits of companies. RBI warned that the slowdown in the real sector was affecting the financial sector.
According to the latest data, private and foreign banks saw a sharp drop in growth in credit flow as lenders have turned wary of advancing loans, fearing defaults.
In addition, the incremental flow of credit to segments such as non-banking finance companies and small and medium enterprises and other industry groups have also dropped.
The median forecast of the professional forecasters indicated that during the fourth quarter, industrial growth would fall to 4 per cent, while the services sector was likely to register growth of 8 per cent.
With the farm sector projected to clock 3.5 per cent rise in output during January-April 2009, the economy is expected to grow at 6.1 per cent during the period.The global economic downturn could result in export growth dropping to 12 per cent from 23.7 per cent during the last financial year, while imports are expected to rise 17.7 per cent, against nearly 30 per cent in 2007-08, the survey showed.
For the first time in seven years, exports declined during October and November 2008.RBI said that the award of the recommendations of the Sixth Pay Commission for all central government employees, the rise in exemption in tax slabs, pre-election spending and the farm loan waiver scheme will positively impact the economy.
What could also augur well for the Indian economy were the prospects of an improvement in the consumption expenditure in the medium-term due to the changing demographic pattern and the diversified export basket with Asian countries emerging as a major destination for shipment of goods from India.
RBI's growth worries also emanate from the global downturn. "If the recession is deeper and the recovery is long drawn as is the current expectation, emerging economies have also to contend with second round effects in the form of potential terms of trade losses, erosion of export competitiveness and restricted external financing," the report said.
