Fitch slashes India’s FY ’14 growth forecast to 4.8%

Fitch Ratings has cut India's growth forecast for the current financial year ending March to 4.8 per cent from its earlier estimate of 5.7 per cent, and also cut its projection for the next financial year to 5.8 per cent from the earlier  6.5 per cent, "underlining the severity of the growth shock".

Fitch said in its 'Global Economic Outlook' report released on Thursday that weak demand is a large drag on the economy.

Prospects of a swift economic turnaround have seen a further downward spiral of the Indian rupee, which has depreciated by 20 per cent since the end of May, and increased concerns over the country's large current account deficit, it added.

India's economy expanded at 4.4 per cent in the April-June quarter compared with 4.8 per cent in January-March. "Demand is weak, both externally and domestically, and this is a large drag on the economy," the agency said.

Last week, the Prime Minister's Economic Advisory Council revised its growth forecast for the current financial year downward to 5.3 per cent from 6.4 per cent projected earlier.

"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 import 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.

Fitch added a further positive note, saying that "Improving global growth prospects should support India's manufacturing sector."

On emerging markets in general, 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.

Fitch did not mention the sovereign rating outlook. In July, it had scaled up this outlook from negative to stable. Recently however it had warned of a downgrade if the country was unable to meet its fiscal deficit target.

On the fiscal front, it said the government was likely to cut budget expenditure other than fuel subsidy to meet its deficit target of 4.8 per cent of gross domestic product (GDP).

On inflation, the agency said it expected acceleration in both wholesale and retail inflation in the coming months. In August these were 6.1 per cent and 9.5 per cent respectively.