The wake-up call could not have been timed better. A fortnight ahead of the Budget and the mid-quarter review of monetary policy by the Reserve Bank of India comes the news of a sharp fall in economic growth in the third quarter of the current fiscal to 6.1 per cent. In the same period last year, the economy grew at 8.3 per cent. This is the sixth time in the last seven quarters that growth has declined and is proof, if any were needed, of the seriousness of the slowdown. More than the extent of decline, what should worry policymakers is that manufacturing sector growth was almost flat — at 0.4 per cent in the third quarter — continuing a declining trend since the beginning of this fiscal. Seen together with less than encouraging data on gross fixed capital formation, which declined for the second quarter in succession, the alarm bells should be ringing loud and clear for both the RBI and Finance Minister Pranab Mukherjee ahead of their respective policy statements. What the disappointing third quarter data mean is that the RBI's projected growth rate of 7 per cent for the current fiscal appears hopelessly unrealistic. In fact, the actual growth rate could be even lower than the 6.9 per cent projected by the government.

The government and the RBI are in an unenviable position. The central bank is likely to come under tremendous pressure from industry in the next couple of weeks to drop interest rates. The RBI will be keeping a wary eye on rising oil prices and also the fiscal deficit — the government has already overshot the annual deficit target in the first ten months to January. Yet, it might not be a bad thing for the Governor to allow himself to be coaxed into starting the rate reversal process in the next fortnight's review. A reduction in rates will boost sentiment, which is desperately needed now, and encourage companies to resume investment activity. As for the government, the fiscal deficit is spinning out of control and it has to either cut spending or raise additional resources, both of which are tough. Industry bodies are already raising a shrill pitch against an anticipated increase in excise duties citing the dismal growth figures. If January's industrial growth data, due on March 12, disappoint, as they well might, Mr. Mukherjee could find himself in a tight corner. Come Budget day, he has two choices: tighten the nation's belt — by raising taxes and duties and/or cutting expenditure, thereby running the risk of extending the slowdown — or hold back on raising taxes, peppering the budget with growth incentives in the hope that the fiscal belt can be tightened once the economy is back on the rails. If it boils down to a gamble, Mr. Mukherjee might just be better off wagering on the latter option.

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