Fitch Ratings yesterday said it expects India's gross domestic product (GDP) growth to decelerate to about 5 per cent in FY10 due to recession in advanced economies and the decline in capital inflows.

Fitch estimates Indian GDP growth at 6.5 per cent in FY09.

The new government in India will face considerable challenges in balancing the need for short-term stimulus measures to counter the economic downturn and the necessity of re-establishing a sustainable medium-term path for the country's public finances, Fitch said in its note on India.

India's long-term foreign currency and local currency issuer default ratings (IDRs) are 'BBB-'. The outlook on the foreign currency IDR is 'Stable', while the outlook on the local currency IDR is 'Negative'.

The rating agency said India's slowing economy was met with two supplementary budgets in FY09, contributing - along with lower tax receipts - to a dramatic increase in the consolidated general government deficit, which jumped to an estimated 10.6 per cent of GDP in FY09 from 6.1 per cent in FY08.

"While current economic conditions are prompting many governments to undertake counter-cyclical stimulus measures, the recent deterioration in India's fiscal position accentuates underlying structural weaknesses in public finances that, if unaddressed, could undermine sovereign creditworthiness," says James McCormack, head of Asia Sovereigns at Fitch.

In the near term, the agency expects the new government to focus on the FY10 budget, which will supersede the interim budget in place since April.

Fitch believes the new administration will likely provide additional fiscal stimulus, resulting in a general government deficit of more than 10 per cent of GDP for the second consecutive year, and an increase in the debt/GDP ratio to a record-high 82 per cent. Both the debt and deficit are well above the 'BBB' medians.

The FY11 budget will be shaped in part by the recommendations of the 13th Finance Commission to be published at end-October. Fitch identifies a number of issues that could be taken up by the Commission to improve the medium-term fiscal outlook.

''That food and fuel subsidies may be better targeted, and infrastructure spending programmes implemented more effectively,'' it said in the note.

In addition, Fitch expects the Commission to address the issue of "off-budget" or "below-the-line" expenditures, as their inclusion in budgeted spending would enhance fiscal transparency. The agency also believes the Commission may consider revisions to the Fiscal Responsibility and Budget Management Act of 2003 (as amended), which identified fiscal targets that have subsequently not been met.

RBI survey sees 5.7 per cent growth in FY09
Meanwhile, the Reserve Bank of India (RBI) in its latest survey of professional forecasters said the real GDP growth for the current fiscal will be 5.7 per cent.
This is lower than the central bank's 6 per cent projection in its Annual Policy Statement for 2009-10.

 The RBI has been conducting the survey on a quarterly basis from the second quarter ended September 2007. Done through a questionnaire responded by 17 forecasters who participated in this round, the survey covered component-wise detailed forecasts of GDP growth, inflation, savings, capital formation, consumption expenditure, export, import, interest rates, money supply, credit growth, stock market movements, and corporate profit.

The survey has forecast a 16 per cent growth in bank credit in the current financial year, against RBI's projection of 20 per cent.

A sector-wise break-up of the real GDP for 2009-10 from the survey shows that growth on account of the industrial sector has been revised downwards from 5 to 4.1 per cent, while it remains unchanged for agriculture and for services, at 3 per cent and 7.5 per cent, respectively.

The forecasters are also projecting a negative WPI inflation of 1.4 per cent in the first quarter of the current financial year. This is contrary to the forecast of inflation at 2.4 per cent in the previous quarterly survey.