India slashes growth forecast, ambivalent on deficit

India sharply cut its growth forecast by as much as one percentage point to 7-7.5 percent for this fiscal, cautioning that challenges remain despite progress, while also sounding circumspect on meeting the fiscal deficit target of 3.9 percent of GDP.

This had a telling effect on Indian stocks, pulling key indices down by over 1 percentage point.

In a mid-year review tabled in parliament on Friday, the finance ministry also said the fiscal deficit target for the current fiscal will be met despite some setbacks on divestment, but did not profess optimism on this front for the next fiscal year.

It, nevertheless, said the situation on the inflation front was improving.

"Economy has made considerable progress but challenges remain. The government aims to meet fiscal deficit target of 3.9 percent (of GDP) without big expenditure cuts," said the report, authored mainly by Chief Economic Advisor Arvind Subramanian.

The earlier growth forecast was 8.1-8.5 percent, as estimated in the Economic Survey presented in February. Against this, the economy expanded by 7.4 percent in the second quarter of 2015-16 and 7 percent in the first quarter, according to official data.

One of the reasons for the lower growth was the performance of the country's farm sector, and the country's official chief economist lamented that continuing dependence on monsoon rains remained among the main imponderables to economic outlook.

On fiscal deficit, the report said a lower than expected expansion in the economy will by itself raise the target by around 0.2 percent of GDP, as this is indexed to the government's revenues and expenditure, even as a likely drop in divestment receipts will add to the burden.

"GDP growth has been powered only by private consumption and public investment is a concern. The proposed wage hike for government workers may impact plan for next fiscal," the report said. But tax collections, it added, were relatively buoyant, powered by indirect levies.

Minister of State for Finance Jayant Sinha, however, remained steadfast on meeting the deficit targets. "We will absolutely meet our fiscal consolidation roadmap. We've said the 3.9 percent fiscal deficit target this year is well in hand," he told reporters outside parliament.

With reference to inflation, the forecast of the year ending with a retail annual overall price rise of around 6 percent was in line with the target set by the Reserve Bank of India. But the survey was worried over production of pulses that has seen prices spiralling in recent years.

On the external front, the survey expressed concern over exports -- which have declined for 12 straight months. It said this was also pulling down growth but felt the situation would improve in the coming months.

On the fall in the value of the Indian rupee, the survey attributed it considerably to the major devaluation of the Chinese yuan, but added that the 6.3-percent depreciation during this fiscal showed that the country's currency fared better than its peer economies.