Global financial majors lower India growth prospects

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June 3, 2012

Five global financial services majors, including Morgan Stanley, Stanchart and Citi, have lowered India's growth prospects to 5.7-6.4 percent for the current fiscal, a day after markets received a "shock" from nine-year low GDP growth of 6.5 percent for 2011-12.

June 3, 2012

Five global financial services majors, including Morgan Stanley, Stanchart and Citi, have lowered India's growth prospects to 5.7-6.4 percent for the current fiscal, a day after markets received a "shock" from nine-year low GDP growth of 6.5 percent for 2011-12.

In their reports to clients worldwide, most of them blamed policy inaction by the government as a major roadblock to the Indian economy, which had expanded by 8.4 percent for two consecutive years — 2009-10 and 2010-11– before plunging to 6.5 percent in the last fiscal.

J P Morgan and CLSA were also bearish on India. The 5.3 percent January-March 2012 quarterly growth, again a nine-year low, was "a shock to markets since it was lower than even the most pessimistic forecast… And suggests the driving force behind the India growth story – the consumer– has lost momentum," Standard Chartered said in its research report.

The release of GDP data yesterday, it said, "should act as a wake up call for all authorities, especially the government. However, with a fractured coalition at the Centre and the ongoing policy paralysis which has plagued the economy since mid-2010, the market is likely to pin most of its hope on action by the RBI". The RBI is set to review interest rates on June 18. Standard Chartered lowered its 2012-13 GDP growth outlook for India significantly to 6.2 percent from 7.1 percent.

Morgan Stanley scaled down growth projection to 5.7 percent from 6.3 percent for the current fiscal stating "a stagflation type environment is emerging". In the stagflation situation, while inflation rises there is stagnation or lowering of economic expansion. It said the banking system stress remains a concern. Earlier last week, Finance Minister Pranab Mukherjee too had asked banks to pull up socks and reduce their non-performing assets in the wake of difficult economic situation. CLSA said it will probably revise the 2012-13 forecast downward to around 6 percent.

The problems, it said, "this time are homegrown due to self goals by the government. Essentially, India is experiencing an abnormal cycle and lower interest rate, especially in the light of strains on the balance of payment, cannot make up for the fallout from a comatose government". Citi Group said India is expected to grow slower at 6.4 percent in the current fiscal. Releasing its Manufacturing Purchases Managers Index (PMI) for May, the Citi said although the PMI is still in expansionary mode, the month-on-month deceleration in domestic demand does indicate a subdued growth outlook in the coming months.

"We expect financial year 2012-13 GDP to come in at 6.4 percent…," said Rohini Malkani, Economist, Citi India. J P Morgan has also lowered the India's growth forecast for 2012-13 to 6.3 percent from 7.1 percent projected earlier. "We have been highlighting increasing downside risk to our growth forecast of 7.1 percent…As much awaited domestic policy actions to restore investor confidence continue to be postponed, and downside risks to global growth – emanating from mounting European uncertainties – have increased in recent weeks," it said.

While global agencies are not optimistic about India's growth story, Finance Minister Pranab Mukherjee in his Budget had pegged the GDP growth in 2012-13 at 7.6 percent (plus, minus 0.25 percent).


Courtesy: ET