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New Delhi: Flying in the face of government and central bank claims that the economy is accelerating, international credit assessor Moody’s Investors Service on Tuesday forecast that India’s growth would slow to 7% in the year to March from 7.3% in the previous year because of below-normal monsoon rain.

Moody’s lowered its India growth forecast by half a percentage point from the 7.5% it estimated earlier. The government expects gross domestic product (GDP) to expand 8% in 2015-16. The International Monetary Fund and the Asian Development Bank have forecast growth of 7.5% and 7.8%, respectively.

“We have revised our GDP growth forecast down to around 7%, in light of a drier-than-average monsoon although rainfall was not as low as feared at the start of the season," Moody’s said in its Global Macro Outlook released on Tuesday.

The government of Prime Minister Narendra Modi has been striving to quicken growth in Asia’s third largest economy since it took office in May last year, promising a spending boost and moving to clear up a regulatory logjam that has held up large infrastructure projects.

The Reserve Bank of India (RBI has cut its repurchase rate three times by 25 basis points each since January to lower borrowing costs and invigorate economic growth. (One basis point is one-hundredth of a percentage point).

The investment cycle is yet to turn and the transmission of the rate cuts through the banking system has been slow.

In April, the India Meterological Department (IMD) said India could experience a second consecutive year of sub-par monsoon rainfall, amplifying worries for policymakers and farmers after last year’s drought-like conditions, and unseasonal winter showers that damaged standing crops and eroded rural demand.

On Monday, IMD said the monsoon rainfall deficit had widened to 10% as most parts of India experience a dry August. Weak monsoon conditions will prevail for the next 10 days and the overall monsoon precipitation will be below normal this month, according to an extended range prediction by the Indian Institute of Tropical Meteorology.

“Since the first IMD forecast of a weaker monsoon, there has been uncertainty around food inflation and its impact on consumption and interest rates," said Atsi Sheth, a sovereign ratings analyst at Moody’s Investors Service in Singapore.

“This affects the investment outlook—as you have seen in recent data for the IIP (Index of Industrial Production, PMI (Purchasing Managers’ Index) and bank credit growth, which is improving but very slowly," she added.

India’s factory output grew 3.8% in June compared with 2.5% a month ago. The Nikkei Manufacturing PMI,compiled by Markit, rose to 52.7 in July from June’s 51.3.

Sheth said the performance of the monsoon has been such that while it had been better than anticipated, it is still unlikely to significantly boost rural growth and consumption, a key driver of GDP growth.

“Also, we look at agriculture’s growth effect not just in terms of its 17% contribution to output, but also its importance in employment and rural household income generation, which is much higher," she added.

So far, the rainfall deficit in east and north-east India is 13% and central India 9%. South peninsular India has a rainfall deficit of 20% and north-west a surplus of 1%.

The country will receive only 84% of the 50-year average rainfall in the second half of the June-September monsoon season this year, the weather forecaster said.

Monsoon rainfall is a crucial element of economic growth in India, where more than half the farmland is rain-fed. In 2014-15, deficit rain during the kharif (monsoon crop) season and unseasonal showers ahead of the winter harvest led to a dip in foodgrain production, but the fourth advanced estimates released by the agriculture ministry on Monday showed that the impact of deficit monsoon was less than earlier estimates.

Last week, the cabinet committee on economic affairs approved several measures to mitigate the damage caused by deficient rainfall. The 300 crore package includes diesel subsidy for protective irrigation and additional subsidies for resowing, horticulture and fodder crops.

In its report, Moody’s said that as a net importer of commodities, India’s growth outlook benefits from the fall in commodity prices over the past year.

“It is also little affected by demand from China and more generally slower global trade growth," it said.

The rating company retained its earlier forecast of 7.5% growth in the Indian economy in 2016-17.

“Economic activity will continue to strengthen on the back of a gradual implementation of reforms that foster domestic and foreign investment. Consumption growth will continue to be supported by large income gains as inflation has fallen to relatively low levels by the country’s past standards and favourable demographics," it added.

Moody’s said barring a large shock to commodity prices or food inflation, the central bank’s inflation targets are achievable. Retail inflation slowed sharply to 3.78% in July from 5.4% in June, on the back of a higher base a year ago, well within RBI’s 6% target for January 2016.

“Maintaining inflation at lower levels than in the past will support real incomes and spending. As long as the central bank’s objective is credible, it will also foster investment by providing more visibility about future revenue growth and margins," it added.

Moody’s cautioned that the main risk to its forecast is that the pace of reforms slows significantly as consensus behind the need for economic reform weakens once the least controversial aspects of the government’s plan are implemented.

In a 30 July report, Moody’s said the government’s inability to push through key reforms legislation, such as the land acquisition bill, flexible labour laws and the goods and services tax (GST) bill, will hurt India’s medium-to-long-term growth prospects.

One analyst said such reforms wouldn’t be easy to push through.

“The bigger and impactful structural reforms such as rollout of GST, land acquisition, transformation of the agricultural sector have still not seen the light of day and are fraught with various contentions," said Ati Ranjan, head of investment research at analytics and research firm Aranca. “Lack of any substantial pick-up in investment in private sector is leading to decline in corporate earnings growth."

Still, a further decline in interest rates, coupled with an increase in demand, could encourage capacity expansion across sectors, Ranjan said.

“The current themes of low oil and gold prices have been somewhat of a blessing for India. However, it still has a long way to go to address the structural inefficiencies and ensure sustainable economic growth," he added.

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