The Indian economy is expected to end the current financial year (2014-15) with a growth of around 5.5% and meeting the fiscal deficit target is a major challenge, a mid-term review of the economy revealed on Friday .
Prepared by the finance ministry , the review said despite sprouting of green shoots, a robust recovery is yet to set in and private investment had not picked up and was being held up by the legacy of the distressed corporate balance sheets. But, the mid-term review said India's medium-term growth prospects were promising and the trend rate of 7-8% should be within reach.
It said in the short-term, the performance of indirect tax receipts -which grew 5.6% in the first six months of the current fiscal -and the muted pickup in credit also point to ongoing weakness relative to potential.On the upside, inflation has come down dramatically and the monsoon failed to take as much of a toll on growth as expected.
Elaborating on fiscal challenges, the review said the tax base was weaker than expected thanks to unanticipated moderation of inflation, revenue projections were over-op timistic and the Budget was unduly burdened by a legacy of carried over expenditures.
“Above all, the deficit target represented strongly procyclical fiscal policy-consolidation when growth was below potential, which is ambitious at the best of times and also unusual amongst the major economies. Adhering to the fiscal deficit target of 4.1% of GDP in 2014-15 is a major challenge. The government, with its commitment to fiscal consolidation, is addressing the challenges on various fronts that impact the fiscal deficit. A pickup in activity in the second half of the fiscal is critical to prevent a slippage and to meet the overall fiscal deficit target during 2014-15,“ the report said.
It said the backlog of stalled projects needs to be cleared more expeditiously . “Where bottlenecks are due to coal and gas supplies, planned reforms of the coal sector and auctioning of coal blocks de-allocated by the Supreme Court as well as increase in gas price to boost supply will help.“
The review called for reviving public investment as one of the key engines of growth. It called for accelerating reforms and urged states to follow. “On many issues, of which GST is just one example, the impact of sound policies can only be realized if states also implement reforms with a zeal. India needs the strength and stability of cooperative federalism, while harnessing the dynamism and energy of a competitive federalism. In sum, there is growing ground for hope but narrowing room for complacency ,“ said the review.