Fitch Ratings cut India’s growth forecast for the current financial year to 4.8 per cent, saying weak demand is a large drag on the economy.
The new estimate compares with projections of 5.7 per cent made in June and 7 per cent in September, underlining the “severity of the growth shock,” the rating agency said in its ’Global Economic Outlook’ report released on Thursday.
Fitch said prospects of a swift economic turnaround have been further dented by a 20 per cent fall in the domestic currency since the end of May due to increased concerns over the country’s large current account deficit.
The sharp cut in the growth forecast comes when the country faces challenges such as slowing growth, exchange-rate woes and concerns about the current account deficit. India’s economy expanded at a 4.4 per cent pace in the April-June quarter compared with 4.8 per cent in January-March.
“Demand is weak, both externally and domestically, which is a large drag on the economy,” the agency said
Fitch also cut India’s growth rate projection for FY’15 to 5.8 per cent from the June forecast of 6.5 per cent. In September 2012, the company had projected a growth of 7.5 per cent for FY’15.
Last week, the Prime Minister’s Economic Advisory Council had revised its growth forecast for the current financial year to 5.3 per cent from 6.4 per cent projected earlier.
Weaker exchange rate
“The weaker exchange rate has not only weakened consumer and business confidence but has also complicated matters for India’s policymakers,” Fitch said. “Pressure on the exchange rate has hindered India’s ability to provide either fiscal or monetary stimulus to support growth.”
The rating agency said the weaker exchange rate, coupled with high international crude oil prices, would raise the cost of the government’s fuel subsidy programme.
“This is likely to force the government to cut other budget expenditure if it is to meet its FY’14 fiscal deficit target of 4.8 per cent of GDP.
“Rising imported inflation pressures coupled with continued pressure on the exchange rate will limit the Reserve Bank of India’s ability to cut policy rates further,” the report said.
The rating agency expects wholesale price and retail inflation, which jumped 5.8 per cent and 9.6 per cent respectively in July, to “accelerate in the coming months”.
However, Fitch said continued improvement in agricultural output could provide an important boost to the economy since about 70 per cent of the population lives in rural areas.
On the back of a strong monsoon, agricultural output in the second quarter of 2013 rose 2.8 per cent from a year earlier.
“Improving global growth prospects should support India’s manufacturing sector,” it added.
Regarding emerging markets, Fitch said the risk premium component would be the most relevant, presenting a monetary policy dilemma for those with liberalised capital markets, including Brazil and Russia, while the impact would be more subdued in China and India.