By Manoj Kumar
NEW DELHI (Reuters) - India slashed its full-year growth forecast on Friday, citing weak global demand and lower farm output, and called for speedier reforms as well as a review of fiscal and monetary policies to resuscitate economic activity.
In a mid-year review, Prime Minister Narendra Modi's government said the economy would likely expand by 7-7.5 percent in the fiscal year ending in March 2016, sharply lower than an 8.1-8.5 percent growth estimated in February.
Still, the South Asian country will remain the fastest growing major economy as China's gross domestic product (GDP) is struggling to maintain the near-7 percent pace promised by its leaders.
While India is finally emerging from China's shadow in the global growth stakes, it's still not firing on all cylinders.
The government said Asia's third-largest economy is being hobbled by weak corporate spending, tepid global demand and two successive droughts that have hit farm output and a significant improvement was unlikely unless pending tax and financial sector reforms were carried out.
"The improvement in growth has been uneven, powered only by private consumption and public investment," it said.
"To move India rapidly to its medium-term growth trajectory, supply side reforms and demand management will be essential."
Indian markets extended losses after the government's review was presented to parliament, with the 50-share NSE index falling more than 1 percent. The benchmark 10-year bond yield rose 2 basis points to 7.72 percent.
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Profit growth at India's top companies was the slowest in two-and-a-half years in the quarter ending in September, hampering efforts to cut debt in one of Asia's most leveraged corporate sectors.
Slowing profit growth is weighing on corporate spending as companies are utilising the majority of their operating profit to service interest costs.
The government offered no hope for a quick turnaround in corporate balance sheets, which it expects to recover slowly and remain a drag on fresh capital investment.
It, hence, argued for further stepping up public spending on roads, bridges and rail as well as a recalibration of fiscal and monetary targets to help spur demand.
Finance Minister Arun Jaitley has pledged to trim the fiscal deficit to an eight-year low of 3.9 percent of the GDP in 2015/16 and 3.5 percent next fiscal year.
While the government remains confident of meeting this year's target, the report said commitments to raise government salaries and military pensions next year will make it tougher to stick to the committed fiscal consolidation roadmap.
"Both fiscal and monetary policy stances will need to be carefully re-assessed," the government said in the review.
(Writing by Rajesh Kumar Singh and Aditya Kalra; Editing by Malini Menon, Robert Birsel)
