After IMF, World Bank also lowers India's growth forecast

The World Bank on Wednesday cut India's economic growth projection to 6% for the current fiscal from 6.9% estimated earlier and blamed the slow down on corruption scandals and a host of policy issues including uncertainty in tax policies.

Even after the cut, the World Bank's growth forecast is quite optimistic compared to other agencies including multi-lateral lending agency IMF.

However, the World Bank expected inflation to reach as high as 8% by March-end, 2013 due to higher domestic fuel prices among other things.

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"Real GDP growth is forecast to reach around 6% in 2012-13, after 5.3% growth in the fourth quarter of 2011-12 and 5.5 percent growth in the first quarter of 2012-13," the World Bank said in its report on India Economic Update.

For the economy to grow by 6% in 2012-13, 6.17% growth is required in the remaining nine months of the current fiscal, after the first quarter yielded 5.5% growth.

Finance Minister P Chidambaram recently said that he expected India's economy to grow at higher pace in the remaining quarters than 5.5% recorded in the first three months.

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The data on the second quarter GDP is scheduled to be released on November 30, 2012.

It should be noted here that another multi-lateral agency International Monetary Fund had lowered India's GDP projections to 4.9% in 2012 from 6.2% pegged earlier.

The figure of 4.9% was widely discussed, but it should be remembered that this was not the GDP that India officiallly calculates.

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If indirect taxes are excluded (as is done in India or the World Bank estimates) and the fiscal year 2012-13 is taken into account, IMF estimates pegged India's growth at 5.6%, Tom Richardson of IMF explained in interaction on Facebook.

The Bank said the slowdown is at least partly caused by structural problems--power shortages, partly caused by the financial difficulties facing the electricity sector, the corruption scandals that have hit the mining and telecom sectors, investor uncertainty because of pending changes in legislation (mining, taxes, land acquisition), and the tightening constraints of land and infrastructure.

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However, it should be noted here that the Government has already appointed a panel under eminent tax expert Parthasarathi Shome, which has given final report on the General Anti Avoidance Rules (GAAR) and draft report on retrospective amendments to the Income Tax Act. The committee is expected to address the issues of stable environment for tax policies.

The Bank said tighter macroeconomic policies, slow growth in the core OECD countries, and worries about another global recession also weigh on growth.

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The multi-lateral lending agency said important signals to revive domestic growth drivers - to lift sentiment more than produce instant efficiency gains - could come from reforms recently announced and, more importantly, the reform of direct taxes, the implementation of the long-delayed GST, and passage of the land acquisition and mining bills.

It said India's FDI reform announcements and fuel price corrections were widely welcomed by investors.

The Bank also said the downside risks to medium-term growth are high because of the risks to global growth from the precarious situation in Europe.

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Even without a strong worsening of the global scenario, the Bank said India's external financing requirements are high, and likely to expand in the coming years.

Short-term debt (by residual maturity) stood at $ 142 billion at end-September 2011, in addition to the current account deficit of around $70 billion, the World Bank said, also highlighting the point that the RBI's foreign reserves reached $260 billion dollars at end-March 2012.