Economists warn of growth falling below 7%4 min read . Updated: 19 Dec 2011, 12:35 AM IST
Economists warn of growth falling below 7%
Economists warn of growth falling below 7%
New Delhi: India’s economy may expand less than 7% in the current fiscal, slower than the government’s revised estimate of 7.5%, as the country feels the heat from the euro zone debt crisis, economists warn.
Economists had earlier expected gross domestic product (GDP) to increase 7% in the current fiscal and slow further in the following year.
French bank BNP Paribas on Friday cut its GDP forecast for India to 6.5% for 2011-12 and warned of further downside risks.
“Given the tail risk of a disorderly resolution to the euro zone debt crisis, India’s relatively high exposure to European bank deleveraging leaves the risks to even these downbeat forecasts still skewed to the downside," BNP Paribas said in a report titled Eye on the Tiger.
The mid-year economic review released by the finance ministry on 9 December cut the country’s economic growth projection in the current fiscal to 7.5% from 9% projected in February.
Implicit in the projection is an anticipated revival in economic activity in the second half of the fiscal (October-March). In the first half, the economy grew 7.3%.
Moody’s Analytics, in a report on 30 November, said it may have to revise its growth projection for the current fiscal to 6.5% from 7% at present.
“It’s difficult to see this turning around any time soon, especially as the troubles in Europe appear to have some way still to play out. We may need to revise our 2012 growth outlook from the current rate of 7% and towards something like 6.5%. By recent Indian standards, this is a poor performance. It looks like tough times ahead," it said.
The Indian economy grew 7.7% in the first quarter. In the second quarter growth slowed to 6.9%, the slowest pace in nine quarters, as investment demand shrank 0.6% and manufacturing growth slumped to 4.2%. In October, the index of industrial production contracted 5.1% for the first time since June 2009, signalling a sharper than anticipated slowdown.
“Continued fiscal slippage and the retail foreign direct investment reform imbroglio suggest that RBI will receive little support as it wrestles with the economy’s ‘new normal’ of 7% growth-7% inflation," BNP Paribas said, adding that it is unclear whether markets have fully priced in India’s “new normal".
The relative stagnation in structural reforms, combined with a series of confidence-denting corruption scandals, have also impeded capital spending by hurting foreign direct investment flows and dampening domestic business confidence.
After effecting 13 rate hikes since March 2010 to cool persistently high inflation, the Reserve Bank of India (RBI) on Friday signalled the end of the rate increase cycle and said “from this point on, monetary policy actions are likely to reverse the cycle," without stating when that will start.
HDFC Bank Ltd chief economist Abheek Barua said he might have to revise his growth forecast from 7.3% currently to 7% for the current fiscal with a downward bias.
“Earlier we thought sub-7% growth would happen only next fiscal. However, if things falter further, then it (sub-7% growth) might get advanced to this year."
Crisil Ltd’s chief economist D.K. Joshisaid the slippage in growth could be more than most have anticipated. “If the economy slows down at a faster pace than anticipated, then RBI could advance the rate cut cycle," he said. Crisil has reduced its growth projection to 7% from 7.6%.
Joshi now expects RBI to start cutting policy rates in April.
However, he said the rate cut cycle would take time to help the economy gain momentum.
“It may revive markets, but reviving real economy will take time. Given inflation is expected to remain above the comfort level, RBI also cannot be aggressive in rate cuts," he said.
Sending confusing signals about the trend in prices, provisional wholesale price inflation in November moderated to 9.1% while the final numbers released for September showed inflation touched the double-digit mark for the first time after 14 months.
In its global economic review on Monday, Standard Chartered Plc, which cut its growth projection for India in 2011-12 to 7% from 7.4%, said the economic outlook for the rest of 2011-12 and 2012-13 will hinge crucially on the government’s ability to restore investors’ confidence in India’s long-term growth prospects.
“Global developments will undoubtedly play an important role too, but India’s ability to weather the adverse environment will depend on its domestic policies—especially if it aims to remind the world of its structural positives," it said.
The report said downside risks to India have increased, most recently with the sharp depreciation of the currency, which will add to already high inflationary pressures.
A depreciating rupee makes imports more expensive.
“With growth decelerating quite rapidly, this leaves policy makers with a dilemma. If they raise rates to protect the currency, the headwinds to demand will worsen, but if they cut rates to support output, the currency may fall further."
Standard Chartered said growth is unlikely to reverse course until the first quarter of 2012-13. “Government efforts to kick-start the investment cycle, which is already in a contractionary phase, have been minimal.
While household consumption—currently at its weakest level on record—is likely to find a floor thanks to government spending in rural areas and a healthy labour market, weak consumption will weigh on investment in a feedback loop," it said.