Morgan Stanley Monday cut India's economic growth forecast to 5.1 percent from the previously projected 5.8 percent, citing low private investment and poor government finances.

The U.S.-based rating and investment institution reduced its forecast of the country's GDP growth to 6.1 percent from 6.6 percent for the fiscal year 2013-14, Reuters report said.

Morgan Stanley pointed to the decline in private investment and the weak external demand as the major challenge for the economy. High fiscal deficit and strong wage growth in rural areas had lead to "stagflation-type environment", it said.

The country is facing the lowest economic growth in the last nine years. The growth rate was near its lowest in three years in the quarter that ended June 30. However, the growth rate at 5.5 percent was marginally above the expected figures, a government data released Friday showed.

Meanwhile, the HSBC manufacturing Purchasing Managers' Index released Monday showed that India's manufacturing sector growth declined to a nine-month low in August, as exports showed a decline for the second consecutive month, indicating the weak external demand due to the euro debt crisis.

Morgan Stanley warned that the government's inaction can further deteriorate the situation, pushing the GDP growth to 4.3 percent in the current fiscal year.

"In the event of continued inaction from the government, we see very high risk of a potential deeper macro stress scenario," Morgan Stanley said.

Other rating institutions like Citi, CLSA, CRISIL also cut India's GDP growth projection in August.