Rating agency Icra today joined rest of the forecasters to peg down economic growth to 7.3-7.5 per cent from 7.5-7.7 per cent projected earlier, besides pegging Q2 GDP numbers at 7 per cent, following the overall contraction in growth indicators.
This is the lowest projections so far from leading agencies as the forecasts from the Government, RBI, Crisil and CMIE are all above or at 7.6 per cent.
Icra has also warned that Government will not be able to meet fiscal deficit target of 4.6 per cent and said it will shoot up to 5.5 per cent.
"In the light of the dampening business sentiment, sluggish domestic industrial growth in Q2, intensifying macroeconomic headwinds, and the likelihood of lower exports in H2 of the current fiscal, we revise downward our GDP forecast for this fiscal to 7.3-7.5 per cent from the earlier expectations of 7.5-7.7," the agency said in a report.
"Given the anticipated moderation in growth of tax revenues, low likelihood that Government will meet its divestment target, and the additional borrowing it has planned, we also expect fiscal deficit to worsen to around 5.5 per cent of GDP," the report said.
On the second quarter GDP numbers - expected on Wednesday - Icra said it sees growth slowing down to 7 per cent from 7.7 per cent in Q1, led by easing of manufacturing growth, contraction in mining and quarrying output and a mild moderation in the pace of growth of the services sector.
On Sunday, research agency CMIE too revised downward GDP forecast to 7.8 per cent this fiscal from 7.9 per cent. Earlier, RBI had pegged down its forecast to 7.6 from 8 per cent. Another rating agency Crisil has also revised its growth estimate from 7.7-8 to 7.6 per cent.
Warning that next fiscal may also be tough, Icra said "while the execution of ongoing projects and healthy order books may support growth in the current year, investment growth is likely to moderate substantially in FY13 unless policy issues are addressed and there is a substantial pick up in the pace of implementation of big ticket economic reforms."
However, the report is a bit positive on inflation. It said headline inflation is likely to have peaked and will decline to around 7 per cent by March, unless commodity prices jump sharply in the coming months. Core inflation stood at 9.72 per cent in October.
But it warned any further fall in the rupee will exacerbate inflationary pressures. The rupee lost 14.5 per cent since January and touched a life-low of Rs 52.72 last Wednesday against the American dollar. However, after weeks of free fall it gained 25 paise to 51.95 today.
On fiscal deficit, Icra warned it may even cross 5.5 per cent and touch 5.8 per cent if oil companies are further compensated for under-recoveries in H2. Tax collection grew by 14 per cent in H1 against a budget forecast of 18 per cent.
The report warned that elevated input prices, higher interest rates and a falling rupee are likely to compress the margins of producers, leading to further slower tax mop.
Overall, the fiscal deficit in H1 reached 68 per cent of the budget estimate for the year, which pegged the deficit at 4.6 per cent of GDP. The Government is set to borrow Rs 4.7 trillion against Rs 4.17 trillion earlier announced.
Pointing out that growth impulses and business sentiments have weakened in the recent months due to a litany of factor led by regulatory issues, it said issues related to environmental clearances and land acquisition have dented business confidence and a marked slowdown in announcements of fresh projects and capacity enhancement.
Considerable monetary tightening (13 times or 525 basis points since March 2010) to combat sustained high inflation has resulted in a substantial hardening of interest rates, the reported noted.
Although the fiscal policy remains expansionary, higher outgo towards items such as subsidies (particularly fuel) and salaries (reflecting higher DA), limit the fiscal space available for boosting infrastructure spending to support investment growth, the rating agency warned.
On the global front, it said the economic environment remains bleak owing to the deepening sovereign debt crisis in Europe, impacting global trade and financial flows.
The report warned that the rupee fall may only help maintain the competitiveness of merchandise exports, demand for which is likely to suffer in light of the uncertain growth outlook for the advanced economies.
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