India Expects Economy to Grow 5.5% This Year

India’s government Friday projected stronger economic growth this year as investments gradually pick up, but cautioned that a weak rise in revenue is weighing on efforts to improve finances.

The south Asian economy would expand 5.5% in the year through March, the finance ministry said in a report placed in Parliament Friday.

The projected growth rate is at the lower end of the 5.4% to 5.9% band forecast during the federal budget in July and reflects a modest recovery from the below-5% expansion in the past two years.

However, the government acknowledged that it faces serious challenges in improving its finances, which have been pressured by high spending and slowing tax revenue.

“Adhering to the fiscal deficit target of 4.1% of gross domestic product in 2014-15 is a major challenge,” the ministry said. “A pickup in economic activity in the second half of the year is critical to prevent a slippage.”

Indian executives and economists have been optimistic that India’s economy will recover this year from its worst slowdown in decades as the country’s new government hastens long-delayed policy changes to boost business and restore investor confidence.

Prime Minister Narendra Modi’s government has taken a number of steps such as to allow greater foreign investments and cut bureaucratic red tape, which have helped initiate an early recovery. But the lack of bold policy moves has disappointed analysts, prompting many to temper their optimism.

Data issued late November showed growth in gross domestic product slowed to 5.3% in the three months ended Sept. 30, from 5.7% in the previous quarter, stoking concerns that the recovery may already be losing steam.

Indian industry has been pressuring the central bank to lower interest rates for supporting the recovery. The government too has been supportive of its demand, even though the Reserve Bank of India has so far refused to give in to the pressure.

On Friday, the government raised the pitch for rate cuts, saying that the RBI’s interest rate policy appears to be “historically tight” given the sharp decline in inflation.

If the RBI continues with its current policy, real interest rates will reach levels last seen a decade ago when asset prices were surging and the economy was overheating, it added.