A labourer carries a sack of cement against a backdrop of the central Mumbai financial district, in February, 2013 (Reuters).
French bank BNP Paribas slashed its India GDP forecast for the ongoing financial year and said that the country's macro-economic situation was "fast approaching crisis proportions".
BNP Paribas cut India's GDP forecast to 3.7% for the 2014 financial year from 5.7%. If met, it would mark India's lowest growth rate in 22 years. However, the bank expects India's economy to expand by 5.3% in the subsequent year.
Highlighting falling industrial production and capex demand, BNP said Asia's third largest economy appears to be heading into a "tailspin." The depreciating rupee, which has been in freefall since April, policy confusion, rising energy costs and tight financial conditions were together pulling down business confidence in India.
The falling rupee, however, could help boost industrial production and exports, the bank said. India's central bank would then be able to reverse its quantitative tightening and eventually resume policy easing.
BNP also said that the new Reserve Bank of India (RBI) Governor Raghuram Rajan, who will take control on 5 September, will have to battle the "time inconsistency" problem caused by the central bank's contradictory policy objectives.
"India's 'macro muddle' is fast approaching crisis proportions ... we now expect the palpable downside risks facing the Indian economy to largely crystallise over the next 6-9 months," said the BNP Paribas report authored by its chief Asia economist Richard Iley.
"The beatings will continue. RBI's quantitative tightening campaign, in our judgement, has been at best premature and, at worst, wholly injudicious. Next year's general election is necessarily a huge 'wild card'."
South Asia's longest serving prime minister, Manmohan Singh, will lead his coalition government to the polls early next year. But weakening economic growth over the years and multiple graft scandals have dented his coalition's image.
India's economic growth hit a decade low of 5% in the 2013 financial year. Scandals rocked parliament where opposition parties have, on several occasions, refused to engage in debate about legislation that could have boosted growth.
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