The government called on Friday for more monetary easing as it flagged risks to economic growth and budget targets, citing a series of disinflationary impulses weighing on Asia`s third-largest economy.
In its mid-year economic survey, the finance ministry said "tighter" monetary policy meant that real interest rates in India were substantially higher than in comparable emerging economies, further clouding the economic outlook.
Faster monetary easing, the ministry argued, would help deleverage corporate balance sheets and restore banks` profits, helping the economy realise its full potential.
While it retained an official growth forecast of 6.75 percent to 7.5 percent for the fiscal year to March 2018, the report highlighted a stronger rupee, deepening farm distress and a disruption in business activity following the launch of a new sales tax, as headwinds.
"The forecast for GDP reflects the greater risks to the downside," Chief Economic Adviser Arvind Subramanian wrote in the report.
Growth slowed to 6.1 percent in the March quarter, its lowest in more than two years, following monetary reform ordered by Prime Minister Narendra Modi last November to purge high-value banknotes from circulation.
The subsequent launch of a national Goods and Services Tax (GST) has caused chaos on the ground as ambiguous rules have left firms confused on how to price their products.
In a sign of things to come, business surveys showed both services and manufacturing contracting at their fastest rate in years in July, the month that the GST was launched.SCOPE FOR MONETARY EASING
Disinflationary pressures allowed the Reserve Bank of India (RBI) last week to cut its main policy rate - the first easing by an Asian central bank this year - by 25 basis points to 6 percent, the lowest since November 2010.
Yet Subramanian, Finance Minister Arun Jaitley`s top economic adviser, said the policy repo rate was still 25-75 basis above the neutral rate.
Although he didn`t fault the RBI`s new inflation-targeting framework, he did question the approach of its Monetary Policy Committee.
"Both expected inflation and GDP are subdued relative to their equilibrium levels," it said. "The conclusion is inescapable that the scope for monetary easing is considerable."
Even as the RBI resumed cutting rates, it warned inflation could accelerate to as high as 4.5 percent in October-December. The economic survey, however, took the view that India`s inflation is undergoing a "structural shift".
It expects headline inflation to remain below the RBI`s medium-term target of 4 percent through to the end of March 2018. Retail inflation has cooled to 1.54 percent, its lowest level in more than five years.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)