Low inflation likely to boost growth: FM

New Delhi: Moderating inflation and a likely reversal of tight monetary policy will boost the economic prospects during 2012, said Finance Minister Pranab Mukherjee. "I expect the domestic factors to contribute to a better growth performance (in 2012)… The New Year is here, it will bring happiness and prosperity to all," Mukherjee said in an interview to `India Today` magazine.

He said the likely reversal of the tight monetary policy in the economy will boost demand. "Both investment demand and consumption demand should improve as the monetary policy becomes accommodative with inflation declining to more acceptable levels. If external factors also contribute favourably, we should rapidly recover the loss in growth," Mukherjee said.

Asked about his priority for 2012, he said: "Recovering the growth momentum with better price stability."

Food inflation entered into the negative zone in late December and experts have said that this will help bring down headline inflation to below 7 per cent by March-end.

Headline inflation has been near double-digit since December, 2010. The RBI has been following a tight monetary policy for the past two years to tame inflation, but India Inc has blamed rising interest rates for fresh investments getting hindered and for the slump in industrial growth.

Mukherjee refuted suggestions of any `policy paralysis` hindering investments. "I do not agree with this view. A growth of 7 to 7.5 per cent in the current global context is not bad at all by any standards.Indeed, we should take pride in the strong fundamentals of our economy and that we continue to be among the top fast-growing economies in the world," he said.

The government last month revised downwards its growth forecast for the Indian economy to 7.5 per cent in the current fiscal, in line with RBI`s projection, from the earlier estimate of 9 per cent. The economy grew by 8.5 per cent in 2010-11. Economic growth during the second quarter (July- September) stood at 6.9 per cent, the lowest in over two years. Industrial production contracted by 5.1 per cent in October.

Mukherjee accepted that the current economic situation in the European Union nations and the US will have some impact on India`s short-term prospects but added that the economy`s fundamentals remain strong.

"These (impacts) would be mainly through slowdown in global trade and uncertainty in capital flows. However, our economic fundamentals… should help us manage these global consequences," Mukherjee said.

The Minister added that domestic growth drivers remain intact and growth in consumption demand is around 6 per cent. "…. we would like to see some improvement in corporate investments in the coming months. That should happen with inflation moderating and the monetary policy becoming accommodative," he said.

Admitting that there has been some slowdown in growth of investments, Mukherjee said that such a situation has arisen due to weak global cues, tight monetary policy and some domestic uncertainty.

"We are committed to pursuing reforms and we should be able to make progress in enacting the required legislations underpinning policy action in certain sectors as soon as the current circumstances permit us to take the next steps," he said.