Global financial services firm Nomura has sharply lowered India's growth forecast for this fiscal to 5.8 per cent, way below the government's projection, saying the country's monetary and fiscal policies are at loggerheads.
Joining its peers in lowering the forecast, Nomura, which had earlier projected Indian economy to expand by 6.7 per cent, said India's "public policy continues to disappoint".
"With monetary and fiscal policies at loggerheads, we lower our growth projections...Given weaker initial conditions and limited scope for a major stimulus, we revise down our GDP growth forecast to 5.8 per cent for FY13...," it said in a report.
It has also cut its India GDP forecast for 2013-14 to 6.6 per cent form the earlier 6.9 per cent.
The government is aiming at GDP growth rate of about 7.6 per cent this fiscal. India's economic growth rate slowed to 6.5 per cent in 2011-12 from 8.4 per cent in the previous two fiscals.
Amid GDP slowdown, rupee depreciation and warnings from rating agencies, market still harbour hope that that a new finance minister will redirect the economy towards reforms after the presidential election.
Nomura pointed out that in light of the government's failure to take steps to boost the supply side and rein-in its fiscal deficit, the Reserve Bank chose to keep policy rates unchanged in June, despite a sharp growth slowdown.
"Fiscal policies are boosting inflation, to which the RBI has responded by keeping interest rates at an elevated level, hurting growth, and in turn exacerbating the fiscal deficit," it said.
It revised upward its inflation forecast to 7.6 per cent for the current fiscal from earlier 7.1 per cent due to higher food prices and rupee depreciation.
In Monday's announcements by RBI and government to attract more capital inflows, Nomura said "unfortunately, these actions are another set of stop-gap measures.
The underlying issues of an elevated current account deficit and weak investment climate are still not being addressed, it said.
It pointed out that a hike in diesel prices or opening up limits on foreign direct investment are measures that the "economy requires", but these are not yet forthcoming.
Nomura further said that with tough economic reforms difficult to make ahead of general elections, the "window of opportunity for any difficult decisions is the next six to nine months".
The fiscal deficit projections for 2012-13 too have been revised upward at 5.8 per cent from 5.2 per cent by the financial services firm.
Government aims to bring down the fiscal deficit to 5.1 per cent in 2012-13 from 5.76 per cent in the previous fiscal.