Domestic economic growth may nosedive significantly in the latter half of the current fiscal from 5.8 per cent in the second quarter, primarily owing to fall in rural demand following drought, forecasts an economic journal.

''The current growth in manufacturing sector and also the overall gross domestic product may not be sustained given the decline in rural demand following drought, which is likely to show up in the last two quarters of this fiscal,'' observes the latest journal of the Institute of Economic Growth.

The IEG journal attributes 5.8 per cent growth in GDP in the July-September quarter over 5.3 per cent during the same period in the last financial year to significant surge in manufacturing (6.4), financing and institutions (8.9) and construction sectors (7.2).

However, it notes that the impact of drought has not made a marked effect on other sectors.

Resilience in the trade sector continues as exports (15.6) and imports (29) registered a high growth rate in November last, indicating a recovery in the demand which was subdued for a long time.

But it says exports are likely to slow down to 8.9 per cent in the next three months and imports will grow by 14 per cent in the same period.

Prepared by noted economists B B Bhattacharya, N R Bhanumurthy and Sangita Chakravarty, the journal forecasts that index of industrial production, which was 3.7 per cent in November, will be growing by about 5.5 per cent during the next three months.

Subdued inflation rates and existing demand constraints must have led to deceleration in IIP in November, the monthly report says adding that the impact of drought is likely to affect the industrial performance adversely in the coming months. Moreover, expected increase in the world oil prices will also affect the industrial performance.

Projecting 3.3 per cent inflation rate for the next three months assuming stable oil prices, the 'Monthly Monitor' says, ''If world oil prices rise to $40 per barrel following possible United States strike on Iraq, then forecast for WPI inflation rate in the next three months will be 3.5, 3.2 and 4 per cent, respectively.''

On the monetary front, the money supply growth has declined to 15.7 per cent in December from 16.1 per cent in November last even after substantial increase in the credit off-take and the foreign exchange reserves.

According to the IEG, interest rates in the country are expected to fall further with prime-lending rates of banks slated to come down to 10.87 per cent by February-end from 11 per cent now.

The rupee continued to strengthen against US dollar with the rupee-dollar exchange rate appreciating to 47.94 in December 2002, and staying at the same level till mid-January against 48.28 in November.

The monthly journal says foreign exchange reserves, which have increased to $71.347 billion in mid-January, are likely to be around $76 billion by March next.

On account of decline in real interest rate differential, foreign institutional investment, which has declined by $131 million in September last, flows may remain depressed in the coming months.

Although the BSE Sensex continues to witness upward trend in the past few weeks, the IEG journal says, the delay in privatisation of Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited, heightening US-Iraq tensions keeping the investors away, and rising world oil prices depress market sentiments.

But the upturn in the performance of manufacturing sector will revive the sentiments in the market, it adds.

UNI