Fitch cuts India economic growth to 7

8220;Monetary tightening,coupled with a weaker global economy,is likely to weigh on India8217;s growth. This has prompted Fitch to revise down the real GDP growth forecast to 7 per cent for FY8217;12,8221; Fitch ratings said in a special report on India released today.

Fitch had earlier estimated that India would witness 7.5 per cent economic growth this fiscal.

The Indian economy expanded by 8.5 per cent in 2010-11.

While the government had earlier pegged economic growth at 9 per cent for 2011-12,last month it revised the estimate to around 7.2 per cent on account of domestic uncertainties and problems in the euro zone and US.

Terming the current fiscal a 8220;challenging one8221;,Mukherjee had yesterday said the Indian economy8217;s growth rate would be around 7.2 per cent this year.

The economic growth rate slipped to 7.3 per cent during the first half of the current fiscal from 8.6 per cent in the corresponding period a year ago. In the second quarter July-September,GDP growth slipped to 6.9 per cent,the lowest level in over two years.

While the government had blamed the slowdown on the global downturn,India Inc has complained that the high interest rate regime in the country on account of 13 rate hikes by RBI since March,2013,is responsible for hindering growth.

Fitch said the country is experiencing a cyclical economic downturn,which has been exacerbated by the tight monetary policy.

8220;The slowdown has been led by a sharp decline in fixed investment activity despite the robust growth in exports. The contrasting performance suggests that a large part of India8217;s current downturn can be attributed to home-grown factors,8221; Fitch said.

It said that business confidence has suffered from headwinds related to rising costs on account of a rise in interest rates and input prices,besides greater concerns over the investment climate due to incidents of corruption and stalled economic reforms.

The report,however,said the economic growth rate is expected to bounce back to 7.5 per cent in 2012-13 and 8 per cent in 2013-14 as inflation and interest rates decrease.

Earlier this week,the World Bank revised its India growth forecast downward to 6.8 per cent from 8 per cent earlier,citing the tight monetary situation and contagion effect of the global downturn.

In its report,Fitch said inflation in the country may have already passed its peak and is on the way to moderation.

8220;Fitch expects inflation to fall to 7 per cent on average over FY8217;13,reflecting the cumulative impact of monetary policy tightening since early 2010,8221; it said.

Headline inflation fell to a two-year low of 7.47 per cent in December,2011. Food inflation entered the negative zone in mid-December and stood at -0.42 per cent as of January 7,as per the latest numbers released by the government.

The ratings agency,however,warned that any slippage in the policy,along with further depreciation of the Indian rupee and a rise in international commodity prices,could have negative consequences for growth.

8220;From a sovereign credit perspective,the current economic downturn has not impaired the sustainability of the country8217;s public debt dynamics,8221; Fitch said.

It further said that a sustained deterioration in foreign investor confidence and lower capital inflows,particularly foreign direct investment FDI,could lead to tightening of financing conditions and impact investments.

8220;This could worsen if failure to consolidate the fiscal deficit leads to 8216;crowding out8217; of private sector activity.

Persistent weak investment would hold back a recovery and could ultimately constrain potential growth and weaken the sovereign credit profile,8221; the report said.

Fitch added that the geopolitical crisis in the Persian Gulf,where the Iran and US are in a standoff over suspected nuclear proliferation by the Islamic Republic,poses a risk to oil prices and India8217;s balance of payments.

Around three-quarters of India8217;s oil and gas requirements are met by imports and the weakening rupee,which has depreciated by over 15 per cent so far this fiscal against the US dollar,had made imports expensive.

The report said that a sharper-than-expected economic slowdown or surge in crude prices could hurt the government8217;s resolve to stick to its fiscal consolidation plans.

8220;The impetus to make new unfunded spending commitments could intensify as general elections come closer,which are set to take place in 2014,8221; Fitch said.