Economists cut India growth forecasts

Posted on May 25, 2012

Goldman Sachs and Bank of America Merrill Lynch became the latest global banks to downgrade India’s economic growth outlook on Friday, in a sign that the sharp slowdown affecting Asia’s third-largest economy is worsening.

Goldman cut India’s growth estimates to 6.6 per cent from 7.2 per cent for the fiscal year ending in March 2013, while BofA revised its forecast to 6.5 per cent from 6.8 per cent for the same period.

    The two join Morgan Stanley, which revised its annual outlook for India’s economic growth to 6.3 per cent this week, blaming parliamentary deadlock for its downward revision. New Delhi is due to release its latest growth figures next Thursday.

    India’s economy has been slowing for more than a year as corruption scandals involving senior members of the Congress-led coalition government have paralysed parliament and blocked key reforms to boost investment.

    India’s macroeconomic landscape has deteriorated further since the start of the year. New Delhi’s fiscal and trade deficit have ballooned to 5.8 per cent and 9.9 per cent of GDP respectively, while inflation has shot back into double digits.

    The Indian rupee also weakened to a record low against the dollar this week, which is likely to fuel inflation further in coming months.

    Meanwhile, industrial output contracted 3.5 per cent in March 2012 and exports have been declining consistently, as demand in Europe for cheap Indian goods has dropped.

    In explaining their lower estimates, the banks blamed New Delhi’s inability to revive the country’s reform agenda, the worsening fiscal conditions of the economy and the deteriorating investor sentiment.

    “The impact on corporate sentiment of a confluence of negative factors is meaningful, and we think they will have a significant impact on investment demand,” said Tushar Poddar, Goldman’s chief India economist.

    In a research note, Morgan Stanley analysts wrote: “We believe that the growth slowdown will be both deeper and more prolonged than what the consensus is expecting with adverse implications for the banking sector. At this juncture, we believe that the risks to the growth outlook remain skewed to the downside.”

    During the past three months of last year the Indian economy grew 6.1 per cent – the slowest increase since 2009 – compared with a year earlier when it rose 8 per cent.

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