Rating agency CRISIL slashed India's growth forecast to 5.5 percent for the fiscal year ending March, one of the lowest estimates on the street, just two months after pruning its projection to 6.5 percent from 7 percent.
Poor monsoon rainfall in India alongside a weakening euro zone outlook contributed to the latest cut in the growth projection, CRISIL said on Tuesday.
"The revised growth forecast assumes that the stretched fiscal situation will limit the ability of the government to give a generous stimulus to the economy," its statement said.
Growth in Asia's third-largest economy faltered to a nine-year low of 5.3 percent in the January-March quarter, due to stalled economic reforms and higher interest rates.
CRISIL, which is the India arm of Standard & Poor's, doesn't give a sovereign rating. S&P, which has a rating of BBB- on India, in April changed its outlook to negative from stable.
A Reuters poll last month showed that in the current fiscal year, India is expected to grow at its slowest pace in a decade, 6.3 percent. In the poll, Spanish bank BBVA's estimate was the lowest at 5.6 percent.
On July 31, in its quarterly review of monetary policy, the Reserve Bank of India cut the economy's growth forecast for the current fiscal year to 6.5 percent from 7.3 percent.
Slowing growth has put pressure on investments, hurting the pace of industrial expansion over the last few months. A Reuters poll projects factory output expansion at 1.0 percent in June, from 2.4 percent in May.
INFLATION FORECAST RAISED
CRISIL also raised inflation projection for 2012/13 to 8 percent from 7 percent, factoring in the impact of a bad monsoon, which would raise food prices.
The Reserve Bank of India (RBI) has been reiterating concerns over rising food prices alongside a high subsidy bill, which could worsen the fiscal deficit. The summer drought has put a question mark over the government's ability to raise fuel prices.
India's new finance minister P. Chidambaram on Monday attempted to soothe investors by pledging action to bring government finances under control.
"Swift policy action to solve issues related to mining, land acquisition and speedy clearance of projects can create upside to the growth projection," CRISIL said.
The government's target of reining in the fiscal deficit to 5.1 percent of gross domestic product looks increasingly elusive because of subdued tax collections and slowing growth, economists say.
In the financial year ended March, the government's fiscal deficit climbed to 5.76 percent of GDP, far above the initial budgeted projection of 4.6 percent.