New Delhi: Standard Chartered on Friday lowered India's growth forecast for the current financial year to 4.7 per cent from earlier 5.5 per cent, citing "upside risks" to inflation and fiscal deficit.
According to the global financial services major, sharp weakness in the rupee value is starting to weigh on India's economy, as reflected in the slump in industrial activity and the spike in July WPI inflation.
"We revise down our GDP growth forecast for FY'14 to 4.7 per cent from 5.5 per cent," Standard Chartered said in a research note today.
The two factors have driven this downward revision, first is the weak industrial activity and the second factor is that slower industrial activity is likely to continue to weigh on the services sector.
In Q1-FY'14, the index of industrial production ( IIP) contracted 1 per cent against 2 per cent growth in Q4-FY'13. A sharp revival in this space appears "unlikely" in the face of recent forex losses, higher interest rates and weak sentiment, Standard Chartered said.
With regard to the slowdown in the services sector, the report said, "Telecom subscriptions and the services PMI, already reflect this; we expect it to become more broad-based as the year progresses."
Standard Chartered is of the opinion that worries about a 1991-style balance-of-payments (BoP) crisis are exaggerated. "India's current account (C/A) deficit is narrowing; we expect this, along with a pause in the USD rally, to push USD-INR lower in Q4, although election worries linger in the background," the report said.
The bank has a positive outlook on the current account. "The trade deficit narrowed to $12.2 billion in July from $20 billion in May and is likely to improve further in the near term," the bank said.
"Gold and silver imports have declined substantially following import duty hikes and tighter import restrictions, and exports should benefit from the pick-up in global growth. This is likely to narrow the current account deficit to 4% of GDP in FY14 from almost 5% in FY13," it added.
While financing risks are likely to persist in the near future due to capital outflows, the bank expects inflows to resume eventually.
According to the report, favourable monsoon, election-related spending and better global growth in the second half of the current financial year should provide some support, but "high leverage, high interest rates and policy uncertainty remain strong headwinds".
"Since the government has repeatedly emphasised its intention to adhere to the fiscal target, a one-off hike in diesel prices or a scaling back of other expenditure to accommodate the higher subsidy burden cannot be ruled out," Standard Chartered said.
The country's economic growth hit a decade low of 5 per cent in the last fiscal on account of poor performance in the farm, manufacturing and mining sectors.
The Central bank, in its First Quarter Review of Monetary Policy on July 30, had cut the growth projection for 2013-14 to 5.5 per cent from an earlier estimate of 5.7 per cent. The government in February had projected 6.5 per cent growth for 2013-14.