Ratings agency Fitch on Tuesday revised its growth projection for the Indian economy in 2011-12 downward to 7% from the earlier estimate of 7.5% on account of sustained inflation, the global slowdown and high domestic interest rates.
In its report, Global Economic Outlook: December 2011, the agency said the Indian economy is likely to regain the 8% economic growth trajectory only in 2013-14.
"India's economic outlook remains challenging as growth is likely to slow against a backdrop of elevated inflation. The economy is likely to remain weighed down by a combination of the weaker global economy and higher domestic interest rates," it said.
"This has prompted Fitch to revise down its real GDP growth forecast to 7% in FY-12... from 8% earlier," it added.
The agency has also revised its growth forecast for 2012-13 downward to 7.5% from 8% earlier and for 2013-14 to 8% from the previous estimate of 8.5%.
"The Indian GDP growth rate is expected to touch the 8%-mark in FY'14 only," it said.
Fitch's 7% economic growth projection for the current fiscal is way below the government's 7.5% forecast. The government, in its Mid-Year Review released last week, revised the growth projection to 7.5% from the forecast of 9% in the pre-Budget survey.
The Indian economy expanded by 8.5% last fiscal.
The Fitch revision comes at a time when the economy grew by a mere 6.9% in the July-September period, the lowest in nine quarters.
Industrial production witnessed a contraction after 28 months and shrank by 5.1% in October.
India Inc has blamed repeated rate hikes by RBI, which have led to an increase in the cost of borrowings, for hindering fresh investment and the slowdown in industrial activity.
Headline inflation has been above the 9%-mark since December last year. The Reserve Bank has increased key policy rates 13 times since March, 2010, to curb demand and tame inflation.
"Headline inflation may not ease soon due to supply side pressure... Although the combination of slower economic growth and higher interest rates could eventually reduce demand driven pressure, supply-side pressures may not ease so quickly," Fitch said.
It said the recent weakening of the rupee, which has fallen roughly 15% in the past three months, coupled with elevated commodity prices, particularly crude oil, suggests that it will take time before headline inflation exhibits a significant improvement.
The RBI and the government have projected headline inflation to moderate to around 7% by March, 2012.
Regarding the impact of the euro zone crisis on India, Fitch said any prolonged uncertainty would impact the domestic economy.
Fitch's revision of India's growth forecast comes less than a week after another ratings agency, Crisil, last week lowered India's growth projection in 2011-12 to 7% from the earlier estimate of 7.6%.