The Reserve Bank of India (RBI) today sharply lowered this fiscal's economic growth projection to 5.8 per cent, from 6.5 per cent earlier, in view of global and domestic factors like poor investments and subdued demand.
"Global risks have increased further and domestic risks have become accentuated by halted investment demand, moderation in consumption spending and continuing erosion in export competitiveness accompanied by weakening business and consumer confidence," RBI Governor D Subbarao said in half yearly review of the monetary policy.
Notwithstanding improvement in rainfall during August and September, he said, the first advance estimates of the 2012 kharif production are somewhat less buoyant in comparison to the previous year.
"Accordingly, even while prospects for agriculture appear resilient, the overall outlook for economic activity remains subdued. On these considerations, the baseline projection of GDP growth for 2012-13 is revised downwards to 5.8 per cent," he said.
Indian economy recorded a growth of 5.5 per cent in the first quarter of 2012-13.
Subbarao noted that the large twin deficits Ė the current account deficit and the fiscal deficit -- continue to pose significant risks to both growth and macroeconomic stability.
A large CAD poses challenges for financing it in the current global environment, he said.
In a situation of volatile capital flows, the deficit could exacerbate downward pressures on the rupee, he said, adding that a persistently large fiscal deficit reduces the space for a revival in private spending, particularly investment spending, without quickly re-kindling inflationary pressures.
Praising the government's recent policy decisions to revive economy, Subbarao said there is an urgent need to improve investment.
"Domestically, a revival in investment activity, which is key to stimulating growth, depends on a number of factors. In particular, recent policy announcements by the Government, which have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions," he said.
The RBI had projected GDP growth of 7.3 per cent for 2012-13.
In the first quarter review in July, it was revised downwards to 6.5 per cent on an assessment that risks to domestic growth from the global slowdown, weak industrial activity and slower growth of services had materialised.