Why economists have trimmed India's GDP forecast

India's economic growth will accelerate this fiscal year but economists in a Reuters poll trimmed their forecasts, tempering their optimism the first majority government in three decades would quickly bring in reforms and spur business investment.

While the latest consensus still suggests growth will beat the rate of less than 5 per cent seen in the past two years, it does not reflect the stock market euphoria since Prime Minister Narendra Modi's historic election win two months ago.

The new mood has helped push the Sensex index of leading shares up nearly 24 per cent since the start of the year.

"A lot of it at the moment is sentiment," said Daniel Martin, Asia economist at Capital Economics.

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"The stock market rallied and the rupee is a bit more stable but until we see Modi doing something to justify the optimism, we are going to remain cautious."

Asia's second-largest economy grew 4.7 per cent in the fiscal year to March 2014.

The poll of 25 economists taken this week forecast growth would rise to 5.3 per cent in the current fiscal year, slightly down from the 5.5 per cent expected in April, when the world's largest democracy was in the middle of national elections.

Growth is expected to be 6.3 per cent next year, unchanged from the previous poll.

For some forecasters at least, it is too early to expect drastic policy changes that would lead to major upward revisions to growth forecasts.

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But Finance Minister Arun Jaitley's first Budget two weeks ago disappointed those who hoped radical reforms were on the cards.

Only five of 16 economists expected the government to meet its Budget deficit target of 4.1 per cent of GDP for the current fiscal year.

Jaitley has promised to boost annual economic growth to 7-8 per cent in three to four years.

Consumer price inflation, which has been the biggest challenge for the Reserve Bank of India and the government, has cooled.

It dropped to 7.3 per cent in June, the lowest level since this series began in January 2012, from 8.3 per cent in May.

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But inflation is still forecast in the poll to average 7.7 and 7.5 per cent over the current and following quarters, and 7.7 per cent this fiscal year, before falling to 7.0 per cent next year.

The Reserve Bank of India is expected to leave its main policy rate unchanged at 8 per cent well into next year.

Factory output growth, which has averaged less than 1 per cent in annual terms over the past 12 months, has been one of the biggest drags on growth. But it picked up to 4.7 per cent in May compared to a year earlier.

A separate Reuters poll taken last month showed stock market strategists remained bullish, predicting the Sensex would keep setting record highs in the coming year.

(Polling by Shaloo Shrivastava)