The Institute of Economic Growth has painted a dismal picture of the country's economic prospects in 2003-04 and said the cascading effect of last year's drought on the economy will be felt in this fiscal also.

The institute's Monthly Monitor for March has said the impact of the Iraq war could also retard economic recovery after the expected low growth in 2002-03.

Not only would the lagged impact of low agricultural output in 2002-03 partly restrain the Index of Industrial Production in 2003-04, the increase in the service tax rate would also act as a damper, it said.

The IEG has forecast an IIP growth of 5.8 per cent in February, 6.1 per cent in March and 4.9 per cent in April 2003, down from 6.4 per cent in January 2003.

The think-tank has also projected a wholesale price index-based inflation rate of 6.2 per cent in April 2003, if world oil prices reach $50 a barrel.

Cuts in excise and Customs duties and an expected decline in money supply should, however, reduce overall inflation, the report said, forecasting WPI-based inflation at 5.5 per cent in April, 5.7 per cent in May and 4.8 per cent in June 2003.

It also expects the fiscal deficit in 2003-04 to cross the budgeted 5.6 per cent as revenue receipts would not match expectations.

The cascading impact of agriculture on the industry and services sectors means "there may not be a big rise in growth in revenue receipts in 2003-04 as is assumed in the Budget", it said.

The report cautions that the attempt in the Budget to increase demand, especially for consumer durables, by reducing taxes might fail as there are deeper structural problems in the economy.

Instead of increasing investment in the economy, the cut in interest rates would only reduce real interest rates and discourage already sagging foreign investment.

This was because the interest rate channel of transmission mechanism was very weak in the Indian context, the report explained.

A decline in the prime lending rate from 11 per cent to 10.9 per cent has been forecast on the basis of the lower short-term repo rate, cut in savings bank interest rates and in the rate offered on small savings.

However, the increase in inflation rates and deceleration in accumulation of forex reserves would lead to a decline in liquidity, which would push up interest rates in the coming months, the report added.

On the Exim policy announced for 2003-04, IEG has said that it relies a great deal on the co-ordination of associated policies with other ministries, the specifics of which are yet to be finalised.

Also, the promotion of agricultural exports and creation of infrastructure would require the cooperation of state governments, which would have to be spelt out clearly before concrete results could be expected.

Further, a high growth in exports would not be sustainable given the exchange rate appreciation and the Iraq war and it is expected to fall to 10 per cent in March-May 2003.

Import growth would, however, continue given the reduction in Customs duties, appreciation of the rupee and expected increase in oil prices. The average import growth for March-May has been forecast at 12 per cent.