Will growth slip below 7%?

Will growth slip below 7%?

Mumbai: Several Indian and foreign brokerages are on a spree to cut India’s GDP growth forecast for fiscal years FY 12 and FY13. In the past few weeks a slew of brokerages – Maquarie, Morgan Stanley, Ambit Capital and several others have cut India’s GDP forecast for FY13 below 7%, raising worries that India will see a hard landing. On the other hand the Organisation for Economic Co-operation and Development has kept India’s GDP growth forecast at 7.2% for calendar year 2012, improving to 8.2% in calendar year 2013.

Indranil Pan, Chief Economist from Kotak Mahindra Bank said, “We have cut the growth forecast for FY13 to 6.9% mainly on expectations of slower growth in the services sector and flattish growth for the manufacturing sector." The bank has a GDP growth estimate of 7.1% for FY 12.

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The HSBC India Services Purchasing Manager’s Index touched a low of 49.1 in October, lowest level in 29 months. On the other hand, India’s Manufacturing Purchasing Manager’s Index has seen very subdued growth in the past few months. The services sector comprises 56% of the GDP and the deceleration seen in the services sector may have larger repercussions on the GDP growth. While investment demand has been slowing for quite some time, growth in domestic consumption, which has so far held up relatively well, may not be sustained, given the vagaries of high inflation and interest rates.

And if the OECD is right, inflation is not going to go away in a hurry. In their projections, inflation for calendar year 2012 has been taken as 7.9% and for 2013 it’s projected at 7.2%. That is well above RBI’s projection of inflation declining to 7% by March 2012. If inflation remains as high as the OECD projects, then the RBI will find it difficult to reduce its policy rate. India will then be saddled with a combination of low growth and high inflation.

If growth falters, than markets will also be under tremendous pressure. Analysts said that if FY12 growth slips below 7%, than earnings downgrades may continue for the next two quarters as slowing growth dents the profitability and revenues of companies. That does not augur well for the markets.