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New Delhi - India slashed its full-year growth forecast on Friday amid slowing domestic and global demand, with officials warning the government is facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target.
Asia’s third-largest economy is now expected to grow by 7.25% to 7.5% in the fiscal year ending next March, the government said in a mid-year review, down sharply from a 9% estimate issued in February.
The slowing economy has put government finances under further stress, fuelling a recent sell-off in the rupee. While tax receipts so far have lagged the budgeted estimates, expenditures are climbing at a faster clip.
“There can be no denial that meeting the target (of fiscal deficit) will not be easy this year,” the finance ministry said in its review, without giving a revised forecast.
Separately, the trade deficit for the fiscal year ending March 2012 is expected to sharply widen to $155-$160bn from $104.4bn a year ago, posing further downside risks to the weak Indian currency.
Slowing demand for Indian merchandise in overseas market is also making the government uncertain about achieving its annual export target of $300bn.
“There is clear evidence of a deceleration in exports growth,” said Rahul Khullar, trade secretary, after releasing the provisional trade data for November. “There is a serious balance of trade problem.”
Net tax revenues have grown at just 7.3% year-on-year in the first seven months of 2011/12, while expenditure has jumped by about an annual 10%.
Adding to the gloomy outlook, the government said raising a budgeted 400 billion Indian rupees ($7.7bn) via stake sales in state-run companies in choppy market conditions would be hard to achieve.
“There can be no denial that meeting the target (of fiscal deficit) will not be easy this year,” the finance ministry said in its review, without giving a revised forecast.
With less than four months of 2011/12 still remaining, economists say the full-year fiscal gap may be almost one percentage point higher than the budgeted target of 4.6% of gross domestic product. The fiscal deficit has already reached nearly 74% of the full-year target.
Any slippage on the fiscal front is expected to force the cash-strapped government to borrow more from the market. It has already unveiled 528 billion rupees of extra borrowing for the remainder of this year.
The government blamed its rising subsidy bill for higher expenditures, but said it is determined to keep any slippage in the fiscal deficit target to a minimum level.
Early this week, the government forecast its subsidy bill for the full year to rise by 1 trillion rupees.
Headwinds
India may face its worst financial crisis in decades if it fails to stem the slide in the rupee, leaving the central bank with a difficult choice over how to make best use of its limited reserves to maintain the confidence of foreign investors.
Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money - namely US dollars - to close the gap, and a weaker home currency makes that costlier.
Europe’s festering debt crisis and worries about the US economy have seen global investors pull funds from emerging markets in recent months, adding to pressure on their currencies.
The rupee is facing the brunt of this capital flight. The partially convertible currency is down nearly 17% against the US dollar this year and is the worst performer in Asia.
The government has attributed the depreciation in rupee in part to global reallocation of funds towards safe haven assets, and has reiterated its policy of forex intervention to control volatility rather than alter the trend.
The weak rupee is confounding India’s inflation management by pushing up the cost imported items. Headline inflation has been steadfast above 9% for the past 11 months, despite 13 rate hikes by the central bank since March 2010.
The government said softening global commodity prices on slowing demand should cool inflation beginning December, and slow it further to 7% by March.
Asia’s third-largest economy is now expected to grow by 7.25% to 7.5% in the fiscal year ending next March, the government said in a mid-year review, down sharply from a 9% estimate issued in February.
The slowing economy has put government finances under further stress, fuelling a recent sell-off in the rupee. While tax receipts so far have lagged the budgeted estimates, expenditures are climbing at a faster clip.
“There can be no denial that meeting the target (of fiscal deficit) will not be easy this year,” the finance ministry said in its review, without giving a revised forecast.
Separately, the trade deficit for the fiscal year ending March 2012 is expected to sharply widen to $155-$160bn from $104.4bn a year ago, posing further downside risks to the weak Indian currency.
Slowing demand for Indian merchandise in overseas market is also making the government uncertain about achieving its annual export target of $300bn.
“There is clear evidence of a deceleration in exports growth,” said Rahul Khullar, trade secretary, after releasing the provisional trade data for November. “There is a serious balance of trade problem.”
Net tax revenues have grown at just 7.3% year-on-year in the first seven months of 2011/12, while expenditure has jumped by about an annual 10%.
Adding to the gloomy outlook, the government said raising a budgeted 400 billion Indian rupees ($7.7bn) via stake sales in state-run companies in choppy market conditions would be hard to achieve.
“There can be no denial that meeting the target (of fiscal deficit) will not be easy this year,” the finance ministry said in its review, without giving a revised forecast.
With less than four months of 2011/12 still remaining, economists say the full-year fiscal gap may be almost one percentage point higher than the budgeted target of 4.6% of gross domestic product. The fiscal deficit has already reached nearly 74% of the full-year target.
Any slippage on the fiscal front is expected to force the cash-strapped government to borrow more from the market. It has already unveiled 528 billion rupees of extra borrowing for the remainder of this year.
The government blamed its rising subsidy bill for higher expenditures, but said it is determined to keep any slippage in the fiscal deficit target to a minimum level.
Early this week, the government forecast its subsidy bill for the full year to rise by 1 trillion rupees.
Headwinds
India may face its worst financial crisis in decades if it fails to stem the slide in the rupee, leaving the central bank with a difficult choice over how to make best use of its limited reserves to maintain the confidence of foreign investors.
Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money - namely US dollars - to close the gap, and a weaker home currency makes that costlier.
Europe’s festering debt crisis and worries about the US economy have seen global investors pull funds from emerging markets in recent months, adding to pressure on their currencies.
The rupee is facing the brunt of this capital flight. The partially convertible currency is down nearly 17% against the US dollar this year and is the worst performer in Asia.
The government has attributed the depreciation in rupee in part to global reallocation of funds towards safe haven assets, and has reiterated its policy of forex intervention to control volatility rather than alter the trend.
The weak rupee is confounding India’s inflation management by pushing up the cost imported items. Headline inflation has been steadfast above 9% for the past 11 months, despite 13 rate hikes by the central bank since March 2010.
The government said softening global commodity prices on slowing demand should cool inflation beginning December, and slow it further to 7% by March.
