'Growth worry persists despite easing inflation'

While risks arising from high inflation and fiscal slippage have receded, concerns about growth and current account deficit have worsened, which may pull down GDP growth to about 6.2 per cent next fiscal, says a Barclays report.

The report also said the effort to reduce fiscal deficit through austerity measures is weighing on growth.

"Worries about inflation and fiscal slippage have receded, but concerns about growth and the current account deficit have worsened," the report said, adding the widening CAD has emerged as a key near-term risk.

Accordingly, growth will also come down as, ‘even with the benefit of a favourable base and some improvement in industrial activity, growth is likely to improve only slowly in the coming quarters.

‘We recently lowered our FY13 gross domestic product growth forecast to 5.2 per cent from 5.6 per cent estimated earlier, and the FY14 forecast to 6.2 per cent from 6.6," the report said.

Referring to the expenditure cut impacting the growth prospects of the economy, the report said as expenditure control remains the key for containing fiscal deficit in the absence of rise in revenues, recovery in growth is likely to be slow.

"Expenditure control will continue to be the key to deficit reduction in the near-term, as potential upside to government revenues remains limited.

"Accordingly, while the Budget arithmetic seems broadly credible, the government's expenditure cut is raising the risks to growth," the report said.

The government plans to reduce the fiscal deficit from 5.2 per cent in the current financial year to 4.8

per cent next fiscal.

The report also pointed out that despite government initiatives and likely monetary easing in the coming months, a turnaround in the capital expenditure cycle is likely to be only gradual as it will depend on government actions with regard to giving speedy approvals to various projects.

Referring to inflation and further easing by the RBI, it said the central bank is likely to reduce policy rates by another 50 basis points (0.5 per cent) by mid-2013.

"Softer headline and core inflation allow the central bank to reduce the repo rate 50 bps in Q1 of 2013.

"We maintain our forecast that the RBI will deliver another 50 bps rate cuts by mid-2013," it said.

The report also said that the RBI's open market operations would remain a key tool to infuse liquidity during the first half of this financial year.

On the balance of payment front, it said the outlook remains under cloud due to high CAD.

According to the report, CAD, which has touched 5.4 per cent in the second quarter of current fiscal, is likely to be around 6 per cent in the Q3 and 4.1 per cent in Q4 of current financial year.

"We forecast the deficit to hover around 4.1 per cent of GDP in FY 14 - a bit narrower, but still well above country's longer-term average of less than 2 per cent of GDP," it said, adding capital inflows will still likely cover most of the financing needs.

The report said the rupee is likely to be around 54 to the dollar in the next three months and at 55 level in 12 months.