Raising hopes of a rate cut, the Reserve Bank of India has slashed growth estimates forecasts from 6.5% projected in the second quarter to 5.7% in a report on Monday. While terming the government's reform measures as positive, RBI's review of macro economic and monetary developments for the second quarter , which is released on the eve of the monetary policy, has said that implementation of measures holds the key. 

The median projection for 2012-13 in RBI's survey has been lowered to 5.7% from 6.5% for growth, while that for average wholesale price index inflation is revised upwards to 7.7% cent from 7.3%. It is widely expected that RBI will reduce the cash reserve ratio—the percentage of deposits that banks are expected to maintain with RBI—by 25 basis points releasing over Rs 16,000 crore. 

According to RBI, the potential growth of the Indian economy has slid, but is still higher than the present growth rate at 7%. RBI's idea of potential growth rate is also a pointer to how fast it expects the economy to growth without overheating and causing inflation. "While the near-term inflation risks are on the upside, inflation is expected to moderate from Q4 of 2012-13 . However, improved supply responses and moderation of wage inflation is vital for bringing down inflation to comfort level," RBI said. The central bank also noted that the current credit slowdown largely indicates tepid demand conditions and distinctively lower credit expansion by public sector and foreign banks partly reflecting their risk aversion. Although the government has been at pains to show that it is serious about curbing the fiscal deficit, RBI is not impressed. 

"Fiscal slippage is likely in 2012-13 despite recent measures by the government . Food, fertilizer and petroleum subsidies remain high and are likely to overshoot Centre's budget estimates ," RBI said. Revival of the investment cycle hinges on resolution of policy uncertainties , particularly those facing the power and coal sectors. 

Economists skeptical on fisc road map 

The finance minister's road map on fiscal consolidation has not impressed economists. Many feel that the issue of subsidies needs to be addressed if the government wants to tackle the fiscal deficit head on. 

"The road map is a step in the right direction, but it lacks detail. In our view, the measures announced will be insufficient to contain the fiscal deficit at 5.3% of GDP in FY13 (Nomura: 5.8%) due to higher subsidies and lower tax revenues. Moreover, as with other reform measures announced so far, implementation remains key," said Sonal Verma of Nomura in a report released here on Monday. According to Kaushik Das, economist with Deutsche Bank, the medium-term fiscal targets are "extremely ambitious" . "There could be a potential revenue shortfall of 0.3% of GDP, coupled with an expenditure overshoot of 0.2% of GDP (assuming a lower non-plan expenditure to offset some of the additional expenditure on subsidies), leading to an overall 0.5% slippage to the budgeted fiscal deficit target of 5.1% of GDP," Das said in a report. TNN