India's economy panel cuts growth forecast sharply

Rupee notes The fall in the Indian rupee has made things more complicated for India's policymakers

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The Indian prime minister's economic advisory council has lowered the growth outlook for the current financial year.

It now expects the economy to expand by 5.3% this year, down from its earlier projection of 6.4% growth.

The new growth outlook is in line with the projections of the central bank and many other economists.

The council also warned that keeping the fiscal deficit within the budget target of 4.8% of gross domestic product (GDP) "could be a challenge".

In its latest economic outlook, the council said that the fiscal deficit during the first four months of the current financial year had already reached 62.8% of the budgetary provision for the full year.

Currency concerns

India's growth has been hurt by a range of factors in recent months. including a slowdown in key sectors such as mining and manufacturing.

Start Quote

The currency problems have momentarily interrupted the process of revival of growth”

End Quote Economic advisory council

At the same time, a lack of crucial reforms has seen foreign investors become sceptical of entering the country.

The situation has become worse in recent months as many investors have pulled out from the country.

A slowdown in India's growth, coupled with a recovery in developed markets such as the US - which has made India a less attractive investment option - has prompted them to look for other options.

The prospect of the US withdrawing a key stimulus programme sooner than expected and a possible rise in interest rates in the US have also played a role in the pull-out.

This has hurt India's currency, which has dipped as much 20% against the US dollar since May this year.

That has made imports more expensive, hurting India's economy even more, not least because of its already high current account deficit.

A current account deficit happens when the country's import bill is bigger than its earnings from exports. A widening deficit puts strain on the nation's foreign exchange reserves.

In its report, the council said the sharp decline in the currency had not only hurt efforts to bring the deficit under control, but was a hurdle in kick-starting growth.

"The currency problems have momentarily interrupted the process of revival of growth," it said.

It added that the currency situation needed to be "stabilised as soon as possible".

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