Close on the heels of the IMF, the World Bank on Wednesday slashed India's economic growth forecast for the current financial year to 4.7 per cent from an earlier projection of 6.1 per cent.
"The report (India Development Update) expects real GDP to expand by 4.7 per cent (at factor cost) this fiscal year before accelerating to 6.2 per cent in FY2015," said Martin Rama, the World Bank's chief economist for South Asia.
In April, the World Bank had projected India's GDP would grow at 6.1 per cent in the current financial year and at 6.7 per cent the following year.
Last week, the International Monetary Fund (IMF), in its World Economic Outlook, projected an average growth rate of about 3.75 per cent in market prices for India in 2013-14, which is expected to pick up to 5.1 per cent next year.
India's GDP growth slowed to 5 per cent in the year ended March from an average of 8 per cent over the past decade.
The World Bank said the pace of economic activity in 2013-14 will be hampered by a weak outturn during the first quarter.
In addition, two consecutive months (July-August) of negative business sentiment and higher interest rates may curb the potential for recovery in the second quarter of 2013-14 even after manufacturing output rebounded in July.
"Although output growth in the first quarter of the current fiscal year fell to 4.4 per cent, growth is expected to rebound strongly in the second half of 2013-2014 with core inflation trending down, a bumper crop expected in agriculture, and exports likely to benefit substantially from the rupee's depreciation," Rama said.
A 5 per cent increase in the area sown is expected to raise agricultural growth to 3.4 per cent from 1.9 per cent a year ago, he added.
Rama said growth is expected to improve further in the medium term as strengthening exports support a recovery in industrial activity and new investment projects come on stream.
"India's growth potential remains high but its macroeconomic vulnerabilities – high headline inflation, an elevated current account deficit, and rising pressure on fiscal balances from the depreciation of the rupee – could impact the speed of economic recovery," said Denis Medvedev, senior country economist for the World Bank, India.
While market sentiment has improved in the past few weeks, challenges remain, highlighting the importance of prudent macroeconomic policies and continued reforms to set strong foundations for accelerated growth, he said.
The current situation offers an opportunity to strengthen the business environment and enhance fiscal space even as the reform momentum has accelerated in the past few months, Rama added. Activity is expected to pick up strongly in the last six months of the fiscal year, rising above 6 per cent in the fourth quarter of the current fiscal, the World Bank said.
This will come as financial markets stabilise, exporters take advantage of improvements in external competitiveness following the depreciation in the rupee, the manufacturing sector recovery continues and delayed investment projects begin to come on stream.
Pressure on inflation is likely to moderate, the World Bank said. The bank cut its projection for wholesale price index (WPI) inflation to 5.3 per cent for the current financial year against its earlier forecast of 6.7 per cent.
The downward momentum in core WPI inflation, observed throughout calendar 2013, is expected to continue in 2013-14, it said.
Six consecutive quarters of sub-6 per cent growth have allowed for an opening of the output gap, which is likely to limit inflationary pressures even with the expected acceleration in economic activity during the forecast period, the bank said.
Fuel prices, on the other hand, will continue to add to the inflationary momentum as international oil prices are likely to remain elevated throughout the forecast period.
"Altogether, WPI inflation is expected to average 5.3 percent in the current fiscal year and decelerate further to 5.2 percent in 2014-15 as pressure from food prices declines due to an improvement in agricultural output," it said.
On the current account deficit (CAD), the report said, it is expected to narrow to 4.1 per cent of GDP in the current fiscal against an earlier projection of 4.5 per cent.
"The first quarter of FY2014 witnessed a widening of the trade deficit as the depreciation in the rupee and inelastic demand for imported oil – which accounts for more than one-third of total merchandise imports – have kept imports elevated while the exports response was subdued," it said.
In July and August, exports rebounded strongly and imports came down, and a continuation of these trends is expected to bring down the trade deficit in the quarters ahead, it said.
Although overseas shipments are expected to rise overall, the export response in the manufacturing sector could be muted due to the rising costs of imported intermediate inputs, especially as metal prices are expected to remain elevated throughout the forecast period, it added.