India’s economic growth may remain subdued in the financial year 2012-13, as inflation eats into consumption and restrains interest-rate cuts, the Organization of Economic Cooperation and Development (OECD) said on Tuesday.

“The economy has slowed, with the weakness focused in manufacturing and investment spending,” the Paris-based OECD said in a report today. “As a result, growth is expected to remain subdued through much of the year.”

India’s economy will expand by 7.3% in the year ending March 31, and 7.8% the following year, the OECD said in its latest global economic outlook.

Inflation may remain uncomfortably high for some time, the OECD said, adding that a further delay in pass-through of fuel costs will lead to more oil subsidies and a wider fiscal deficit.

“Continued policy uncertainty, including as regards further fiscal slippage, would weaken investment sentiment and result in softer near-term growth and an erosion of longer-run prospects,” the OECD said.

A cyclical upturn in investment, stronger external demand and the effects of recent monetary easing will boost growth, the OECD report said, but warned that high inflation would dampen the investment climate.

"A moderate cyclical pick-up in investment is projected in the near term," the OECD said. "Later this year and into the next, growth is set to pick up to around trend rates, supported by the delayed effects of the recent monetary policy easing."

"However, still high inflation will limit the room for significant further relaxation," it added.

On Monday, Morgan Stanley cut its growth forecasts for India, citing a high budget deficit and slowing private investment. It now expects the Indian economy to grow by 6.8%, instead of 7.5%, in 2013.

Standard & Poor's rating agency cut its outlook for India's credit rating to 'negative' from 'stable' in April, citing persistent worries about high twin deficits and political inertia that has stalled progress on major economic reforms.

India's GDP growth slowed to 6.1% in the three months ended December 2011, the weakest annual pace in almost three years, while the rupee has plumbed to record low against the US dollar.

Softening external demand, together with continued strength in imports, has led to a widening current account deficit, according to the OECD report.

Although inflation has moderated from double-digit rates it remains relatively high and expected increases in regulated prices of some oil-related products will add to price pressures which will continue to weigh on household consumption, OECD said.

Monetary policy easing has begun but further action will be constrained by inflationary pressures and limited spare capacity, OECD said.

Fiscal slippage caused the central government budget deficit to rise in FY12.

The Government plans modest fiscal consolidation in FY13, which would help reduce inflation, narrow the current account deficit and promote more balanced growth. However, spending pressures, notably on subsidies, still prevail.