India's economy will grow at 6.7 percent in the current fiscal year, less than an earlier estimate of 7.5-8.0 percent, Prime Minister Manmohan Singh's Economic Advisory Council forecast on Friday.
In recent years the advisory panel has been overly optimistic about India's economic performance, and the revised forecasts are higher than estimates by private economists who now expect growth closer to 5.5 percent for 2012/13.
India's economy has lost momentum due to global headwinds, sluggish policymaking, high interest rates and worries about a drought in parts of the country that may suppress investment and demand.
"While any government's assessment cannot be as pessimistic as that of independent analysts, the fact that government's economic review has lowered GDP growth forecast by 130 basis points and increased the inflation forecast by 100 basis points is a definite reflection of significant increase in macroeconomic stresses. This should motivate North Block (finance ministry) to take some urgent steps to revive the investment climate," said Rupa Rege Nitsure, Chief Economist at Bank of Baroda.
Rahul Bajoria, Regional Economist at Barclays said that "The estimates are pretty much in line with Reserve Bank of India's projections, but the growth number seems to be on the optimistic side on the assumption that agriculture growth won't be as slow as market expects.
"But I am not sure whether the assumption of 0.5 percent agriculture growth will materialise. Even the assumptions over manufacturing growth seems to be optimistic. The government needs to cut down expenditure as tax collection is going to be lower and revenues from divestment still not on board. The government needs to execute divestment decisions much before the final quarter of 2013 fiscal year."
Global, Domestic Headwinds
"The review acknowledges the current headwinds domestically, as well as global, and the downward revision is in line with broad expectations. However, given that there are cost slippage in government finances and reforms yet to come on board, alongside global uncertainty and geo-political risks, there could be downside to risks to growth and upside risks to inflation," said Shubhada Rao, Chief Economist, Yes Bank.
Some think that the forecast is on the optimistic side. "The GDP growth forecast looks on the optimistic side while inflation print can come below 7 percent at end March if the government doesn't raise fuel prices, but that will not be a true reflection of price pressures. In absence of specific government measures, it is difficult to expect capital inflows picking up. With the extent of forex intervention already done, the BoP (balance of payments) is already in deficit," said A Prasanna, Economist, ICICI Securities.
Many economists have slashed their forecasts for India's growth in the current fiscal year to March to around 5.5 percent, saying weak summer monsoon rains have added to the economic headwinds.
Industrial output fell for the third time in four months in June, adding to pressure on new Finance Minister Palaniappan Chidambaram to move quickly and pull Asia's third-largest economy from its worst slowdown in almost a decade.
Wholesale inflation unexpectedly fell in July to a near three-year low but economists doubt the drop will be enough to persuade the central bank to cut interest rates at its September meeting to try to revive the struggling economy.
Central bank Governor Duvvuri Subbarao stuck to a hawkish tone on Monday, emphasising his concern that inflation remains too high and again prodding the government to restrain its own borrowing.
Drought in some regions of the country have hit many crops and could pile pressure on food inflation in the coming months.
The Reserve Bank of India left interest rates unchanged in July for the second straight review, showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate.