With growth trending below the 5 per cent mark for three successive quarters, the Reserve Bank on Tuesday pegged economic expansion at less than 6 per cent from the earlier expectation of over 8 per cent.
“The wide range of estimates using alternative techniques, on balance, suggests that currently the potential growth may be even somewhat lower than 6 per cent,” RBI said in its Macroeconomic and Monetary Developments Report released today.
It said a decline in financial savings, sluggish growth in capital formation over successive quarters, persistently high inflation and low business confidence are the major reasons for the revised estimate.
However, it said a modest recovery is likely to take shape in 2014-15.
The document said potential growth, which hovered at 8-8.5 per cent levels in the period from the second quarter of 2005-06 to the second quarter of 2008-09, has gone down to 6 per cent.
RBI Governor Raghuram Rajan’s predecessor D Subbarao had once suggested that the potential growth of the economy was 7.3 per cent.
A survey of potential forecasters done by the RBI revised growth for FY15 to 5.5 per cent from the earlier estimate of 5.6 per cent.
On inflation, one of the key factors that forced the RBI to keep a tight monetary policy, which in turn affected growth, the document said that the disinflationary path is moving as expected but stressed on the need to be vigilant.
Warning of upside risks to inflation in FY15, it said the recent declines in CPI inflation were primarily driven by lower food prices, the benefit of which would wear out with seasonal changes.
CPI inflation, which assumed greater focus under Rajan, eased by over 3 percentage points to 8.1 per cent in February, while the RBI is targeting 8 per cent by January 2015.
The professional forecasters also lowered their estimate on the average CPI during FY15 to 8 per cent from 8.5 per cent earlier.