Ratings firm Fitch on Friday lowered India's growth projection for the current fiscal to 6% from 6.5% estimated earlier citing challenging economic outlook.
"India's economic outlook remains challenging. The projections for real GDP growth (has been trimmed) to 6% for FY 2012-13 from a previous estimate of 6.5%," Fitch said in its Global Economic Outlook report.
India's economic growth has slowed to a three-year low of 5.3% in the April-June quarter of the current fiscal. The growth had fallen to 6.5% in the 2011-12 fiscal.
Fitch said the high fiscal deficit leaves little room for government for fiscal easing and increasing spending.
A breakdown of GDP by expenditure shows that domestic demand is stagnating as fixed investment and private consumption grew just 0.7% YoY and 4% YoY respectively in April-June quarter, Fitch said.
It said weak investments are affecting supply capacity and thereby pointing towards weaker growth outlook.
Fitch also cautioned that volatile political environment poses risk towards implementation of various reform initiatives unveiled by the government earlier this month.
"The authorities have announced a range of reforms including liberalisation of FDI in multi-brand retail which may help to restore confidence and lift investment, although the volatile political environment points to implementation risk," it said.
The government, earlier this month, opened the multi-brand retail chains to foreign investment, besides allowing foreign carriers to pick up stake in Indian aviation companies.
Besides, the government also hiked diesel prices by over Rs. 5 a litre and capped the number of subsidised LPG cylinders to 6 per family a year.
"Inflation pressures are likely to intensify following the government's long-awaited decision to hike diesel prices by 12% in mid-September.
"The recent rebound in international crude oil prices means that the government may need to raise the prices of other energy-related items," Fitch said.
Experts have said that the hike in diesel prices would push up inflation by up to one percentage points.
"From a monetary perspective, elevated inflationary pressures suggest that the Reserve Bank of India may not be able to aggressively cut policy rates in the near term," it said.
Both the wholesale price index (WPI) and the new consumer price index (CPI) show inflation pressures have again accelerated.
WPI rose 7.55% in August, up from 6.9% in July and CPI grew 10% during the month, up from 9.9% during July.
Earlier this week, Standard & Poor's lowered the growth forecast for India to 5.5% for this fiscal, from 6.5% projected earlier.