India's economic growth could slow to as little as 5.5 percent this fiscal year, Finance Minister P. Chidambaram told Reuters, signalling the possibility that Asia's third largest economy will expand at its slowest pace in a decade.
"I'm looking forward to this year ending with 5.5 to 6 percent growth, barring any unexpected shocks, and next year getting back to 7 percent growth, and in 2014-15 getting back to 8 percent growth," he said in an interview on Sunday at a G20 meeting in Mexico.
The last time full-year growth fell below 6 percent was in 2002-03 when the economy expanded 4 percent. A slump in industrial activity because of slow policy-making and the global slowdown, combined with a drought, have dragged on India's performance this fiscal year, which ends in March 2013.
Until now, the government had estimated growth this year at around 6 percent. The International Monetary Fund last month slashed its 2012 calendar year economic growth forecast for India to 4.9 percent from 6.1 percent.
Chidambaram said India had the wherewithal to again reach its economic potential.
"In 2004-2008 we had 9 percent plus growth. It's not as though we have not done it before," he said. "We have slowed down thanks to the world and some domestic factors, but we are absolutely confident that we will get back to the higher-growth path."
Chidambaram said he was concerned about inflation, which hit a 10-month high of 7.8 percent in September.
"We must learn to live with some inflation, but inflation cannot be at an unacceptable level. Today it is at an unacceptable level," he said.
India's central bank left interest rates unchanged at 8 percent last week, defying government pressure to lower rates for the first time since April.
Rate cut expectations had grown after Chidambaram outlined a recent plan to cut the country's hefty fiscal deficit and boost growth. The bank's announcement failed to calm markets, pushing bond yields and swap rates higher.
Chidambaram said that with a combination of monetary policy, spending cuts, and a tightening of tax collection, India could lower the deficit and foster growth.
"I'm confident that with determination, hard work, and some pain, we will be able to contain the fiscal deficit at 5.3 percent," Chidambaram said.
The revision in the fiscal deficit target will result in additional market borrowing up to the new level, he added. The government borrows via rupee-denominated bonds that foreign investors are allowed to trade.
"I don't expect any additional borrowing over 5.3 percent," he said.
That level of borrowing will amount to at least 200 billion rupees, a senior finance ministry official told Reuters in New Delhi.
REJECTS IDEA OF A DOWNGRADE
Previously, the government had pegged gross market borrowing for the current fiscal year at 5.7 trillion rupees to finance the original deficit target of 5.1 percent.
The finance minister also rejected the possibility that India might suffer a ratings downgrade, after Standard & Poor's recently said the country faces a one-in-three chance of a credit rating downgrade to junk status over the next two years.
"India certainly does not deserve a downgrade and we are taking steps that will contain the fiscal situation," he said.
The Reserve Bank of India cut its GDP growth forecast for Asia's third-largest economy this fiscal year to 5.8 percent from 6.5 percent previously. It raised its inflation projection in March to 7.5 percent from a previous 7 percent.