Government forecasts GDP growth at around 5.5 per cent for FY15

The country's gross domestic product (GDP) is expected to rise to 5.5 per cent in the 2014-15 financial year from 4.7 per cent in FY14 on back of improving macro-economic situation, says the Finance Ministry's Mid-Year economic review which also flagged fiscal challenges like subdued revenue collections.

The review projected that 7-8 per cent economic growth was "within reach" in the coming years and said inflation has fallen dramatically and that declining oil prices will help in containing the current account deficit (CAD) at around 2 per cent of GDP.

The 'Mid-Year Economic Analysis 2014-15' tabled in Parliament also assumed that the Reserve Bank of India would maintain status-quo in the interest rate till March 2015 and a stable outlook for rupee. Industry has been demanding a cut in key policy rates amid slowing industrial production.

"Investment is yet to pick up significantly. But on the upside inflation has come down dramatically... The year (2014-15) could end with growth around 5.5 per cent," it said.

The GDP growth was below five per cent in the past two financial years.

The review, however painted a rosy growth prospect in the medium term saying, "The trend rate of growth of about 7-8 per cent should be within reach. With basic 'public good' provision and investment tapping into cheap labour, India can easily get closer to its growth frontier laying a strong foundation for the long-run."

The review expects the retail (or CPI-based) inflation to be in the range of 5.1-5.8 per cent in the next five quarters.

Referring to fiscal challenges, the review said, "The tax base was weaker than expected thanks to unanticipated moderation in inflation" and the revenue projections were "over-optimistic."

"The Budget was unduly burdened by a legacy of carried over expenditure," the report added.