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Growth forecast likely to turn murky

Mumbai, Oct. 22: In a move that could deepen pessimism about the health of the economy, there are indications the Reserve Bank of India (RBI) will prune its growth forecast to 5-5.5 per cent in the credit policy due next week, from 6 to 6.5 per cent projected in April.

A bleaker growth outlook is primarily the result of a poor monsoon, and the impact that it would have on farm output, apart from the demand for industrial goods in villages.

The RBI had refrained from making any specific projection on the macro-economic situation for this fiscal in its annual report for 2001-02. It said this would be done in the busy-season monetary and credit policy, by which time reliable data on just how agriculture and industry have been scalded by drought would come in.

However, it was forthright in declaring that the growth rate of 6 to 6.5 per cent initially projected would not be achieved. Sources said little has changed since the document was released in late August. However, a realisation that industrial output would be lower, agricultural growth would taper off and services will not be able to grow as fast appear to have convinced the RBI that a milder growth prognosis is inescapable.

The central bank’s April forecast was largely dependent on the speed of recovery in the industrial sector, apart from growth of at least 3.5 per cent in agriculture. “The RBI, therefore, may peg the GDP growth estimate around 5-5.5 per cent since its earlier calculations, based on the assumption of normal monsoons, no longer hold true,” an analyst pointed out.

Earlier this year, the Centre said the agriculture sector would grow 3.5 per cent in 2002-03, down from 5.7 per cent in the previous year. However, with the country receiving its poorest rainfall in nearly 15 years, fresh estimates show that the farm sector could shrink by 2.5 per cent to 3.5 per cent. Predictions about industrial growth have also been lowered to 3.5 per cent.

In the case of services too, a rosy picture is not painted. The Centre for Monitoring Indian Economy (CMIE), for instance, recently slashed its growth forecast for the sector to 6 per cent from 6.5 per cent earlier.

Analysts say the central bank will temper fears of lower growth with references to the positive features of the economy, which includes the absence of inflationary pressures and substantial stocks of food grain apart from the burgeoning foreign exchange reserves.

In August, the Reserve Bank forecast a benign inflationary scenario, despite uncertainties over monsoons. It was reassured by overflowing stocks of food grain, comfortable foreign exchange reserves and the institutional mechanisms to absorb supply-side shocks.

It had also said deterioration in public finances could be tackled with the help of a combination of measures, without seriously impacting the financial markets.

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