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Fitch lowers India growth forecast, says business environment weak

In its Global Growth Outlook report, Fitch said the Indian government's "strong drive to implement structural reforms" should lead to improvements in the business environment and, over the time, to a pick-up in investments.

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Lowering its growth forecast for India to 7.8% this fiscal, global rating agency Fitch on Tuesday said the country's business environment is relatively weak compared with peers and will take time to turn around.

Still, India would grow faster than China this year.

Fitch's view assumes significance as it follows another global giant Moody's warning earlier today that there were growing concerns about risk of policy stagnation in India and "some disappointment" has emerged over the pace of reforms under the Modi government.

In its Global Growth Outlook report, Fitch said the Indian government's "strong drive to implement structural reforms" should lead to improvements in the business environment and, over the time, to a pick-up in investments.

"However, translation of the reforms into higher real GDP growth will depend on the actual implementation. India's business environment is relatively weak compared with peers and will take time to turn round," it added.

Still, Fitch said, it continues to expect a continued acceleration in the Indian economic growth rate, from 7.3% in fiscal 2014-15, which was below Fitch estimate of 7.4%.

"Fitch continues to expect an acceleration in Indian growth, but there are some indications that it may be somewhat slower than previously expected.

"Hence, Fitch has lowered its real GDP growth forecast for India to 7.8% in FY16 from 8%, and to 8.1% in FY17 from 8.3%.

"Capital expenditure has not yet picked up, rural and export demand is weak, and the translation of monetary policy loosening into lower bank lending rates is limited. Downside risks to growth relate, for instance, to below-average rainfall during this year's monsoon season, although the first three weeks of June recorded 16 per cent above-average rainfall," it said.

About the revision of the GDP data series by the Central Statistical Office, Fitch said the new growth levels and a pick-up starting already in mid-2013 remain difficult to reconcile with indicators that show still low investment levels, weak corporate balance sheets and a rise in banks' non-performing loans.

Fitch further said the risks to inflation are tilted to the upside and relate to below-normal monsoon rains, crude prices and external environment volatility, as indicated by the RBI.

"With these risks clearly on the RBI's radar, the window for further rate cuts seems closed for the coming months.

"Yet, the RBI may still respond with another rate cut later in the year if data show these risks have declined and inflation would continue to move broadly in line with the announced glide path.

As regards China, the report said, the growth rate "is in a gradual structural slowdown and our unchanged growth forecast is 6.8% in 2015, 6.5% in 2016 and 6% in 2017".

"India's GDP growth will surpass China's this year for the first time since 1999, and accelerate to 8% in 2016 and 8.1% in 2017. Recovery from the recession in Russia and Brazil will be weak, with growth rates of only 1.5% by 2017," the report said.

The global economy is expected to grow by 2.4% in 2015, Fitch said, while adding that the Greek crisis poses a risk to the economic recovery in Eurozone. 

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