Goldman Sachs, Merrill Lynch downgrade India's growth forecasts

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A parade of global banks is taking the knife to its estimates of India's economic growth this year, worried that a lethal cocktail of poor macro indicators and an environment of policy drift has cast a darker shadow on the economy than previously thought.
The government may have budgeted for the economy expanding by at least 7.35 per cent during the fiscal year to March 2013, but a raft of independent forecasters have pencilled in numbers lower than 7 per cent, citing reasons ranging from stubborn inflation, high deficits and depreciating currency to industrial slowdown and government inaction.

Economists at Wall Street banks Goldman Sachs and Merrill Lynch were the latest to join the downgrade party for Asia's third-largest economy on Thursday, both cutting their GDP growth forecasts to 6.6 per cent and 6.5 per cent, from 7.2 per cent and 6.8 per cent, respectively, which will make it lower than the 6.7 per cent achieved in 2008-09, the year of the global economic meltdown.


Their downgrades followed Morgan Stanley's sharp downward revision of its projection to 6.8 per cent from 7.5 per cent earlier this week. Its downgrade did not end with the present year. Morgan Stanley now expects growth for 2011-12, the year just gone by, to be 6.5 per cent, which is much lower than the government's advance estimate of 6.9 per cent. The government will release its updated estimates on May 31.

"There is near-consensus that the India story has de-rated, with growth at best likely in the 6-7 per cent range," Citigroup analysts said in a note released on Friday.
Global Economic Conditions Likely to Remain Muted
The Citi analysts added that Wednesday's petrol price increase had given some hope that the government may be waking up from its slumber. While Citi is yet to revise its 7 per cent growth for 2012-13, Care Ratings has cut its projection to 7 per cent from 7.3 per cent and Nomura has indicated that its estimates have downward risks. "We see downside risks to our GDP growth forecast of 7.4 per cent y-o-y in FY13," Nomura economist Sonal Varma said in a note to clients on Friday in which she flagged up the prospect of a capital flight that could slow growth further.

Goldman Sachs and Merrill Lynch have blamed drop in investments, lack of government action and a difficult fiscal and external situation for their action. Analysts say while economic growth rebounded smartly in 2009-10 from the depths of 2008-09, this time around it could stay depressed for a longer period because global economic conditions are expected to remain muted.

India's benchmark Sensex is down over 11 per cent from its peak in February, with foreign investors largely staying out of the markets, initially put off by taxation provisions in the budget and now a volatile currency. The recent downgrades to growth projections have come in quick succession to Standards & Poor's cutting India's rating outlook to negative from stable, citing slow progress on its fiscal situation, as well as deteriorating economic indicators.

India's fiscal deficit is now pegged at 5.1 per cent of GDP for the current fiscal year and current account deficit at 3.5 per cent of GDP. Industrial output contracted 3.5 per cent in March 2012 and exports are growing in low single digits.

Lack of action on fiscal consolidation has been the primary concern of all commentators while the finance ministry's determination to press with its tax claim on Vodafone and uncertainty over the tax proposals in the budget have foreign investors rattled. Also, unlike 2008-09, hopes of industrial growth picking up are muted in the current scenario as most agencies note that there is very little monetary and fiscal policy space available with the government to spur the economy this time around.

"It will be very difficult for the central bank to cut rates further and it is not wise to look only at monetary policy to bail us out. According to me, reforms are needed in the fiscal space," Pronab Sen, principal adviser to the Planning Commission, told ET.

Some also expect that fiscal deterioration will lead to more adverse ratings actions in the weeks and months ahead. "What is of concern is the growing recognition that the rise in fiscal deficit is structural rather than cyclical. We expect other agencies to follow S&P's recent outlook revision," Citi has noted.

Nomura said while there have been times when slowing momentum gave way to an upturn, India faces two major challenges. "One is current account deficit, fiscal deficit and weak investment feeding off each other." While the recent hike in petrol prices have raised some hopes the government is finally taking some hard economic decisions, the optimism could soon evaporate if it is not followed up with a diesel price increase - the more difficult decision. But the government says the concerns are overdone.

India will manage to grow at 7 per cent this year, says C Rangarajan, chairman of the Prime Minister's Economic Advisory Council. Planning Commission Deputy Chairman Montek Singh Ahluwalia says a GDP growth of 7.5 per cent in 2012-13 is going to be tough, but not impossible. Adds Sen of the Planning Commission: "I think the downward revision in GDP forecasts is too severe. Investments in the SME sector have the capability to pull the growth story."

Some independent analysts concur, saying the downgrades are exaggerated and most economic indicators will improve in the months ahead. "We believe that going ahead, things will improve. There would be a marginal pickup in industrial production and agricultural growth is also expected to be good," said Madan Sabnavis, chief economist with Care ratings.