India lowers economic growth forecast ahead of budget

• GDP growth seen at 6.5% y/y in 2017/18 vs 7.1% year ago
• Shaky rollout of nationwide tax hits economy, analyst says
• Central bank seen holding interest rates as inflation picks up

NEW DELHI (Reuters) - India lowered its forecast for the current year’s economic growth on Friday before a federal budget is released next month, as businesses were hit by the chaotic launch of new nationwide tax last July.

Finance Minister Arun Jaitley had earlier estimated the economy would grow around 7.5% in the 2017/18 fiscal year, generating enough tax to keep the fiscal deficit at 3.2% of GDP after meeting spending targets.

A worker uses a welding torch to weld an iron machine at the construction site of a flyover in New Delhi - REUTERS/File photo

Gross domestic product is now estimated to grow an annual 6.5% in 2017/18, slower than a provisional 7.1% growth in 2016/17, Ministry of Statistics said in a statement.

Most private economists have pared the growth forecast to 6.2 to 6.5% for this fiscal year, citing the teething troubles faced by businesses during the roll out of a goods and services tax (GST).

“The GST transition impact is clearly visible,” said Shubhada Rao, chief economist at Yes Bank. Sectors such as manufacturing and hotels were badly hit, she said.

Complex rules and technical glitches meant the GST, aimed at transforming India’s 29 states into a single customs union, hit millions of small businesses.

Manufacturing is now forecast to grow at 4.6% this fiscal year compared with 7.9% growth in the previous year, the statement said. Farm output may slow to 2.1% from 4.9%.

Finance ministry officials earlier said slower economic growth was likely to hit revenue collections this year, forcing them to resort to borrow from the market to meet spending targets.

Analysts said despite the lower economic growth, the Reserve Bank of India (RBI) was expected to hold policy rates steady after a recent uptick in retail inflation, which touched 4.88% in November, its steepest level in 15 months.

“Given the recent uptick in inflation pressure and with inflation likely to remain around 5% going ahead, we expect the RBI to be on hold with a guarded stance even though growth estimate has disappointed slightly,” Rao said.

The statistics office will release economic growth data for the October-December quarter on Feb. 28, along with revised full-year growth estimates.