Mumbai: The largest rating agency Crisil on Monday joined global banks to scale GDP growth for this fiscal down by 50 basis points to 6.5 percent citing rising downside risks from muted investment demand, continuing policy logjam, and limited fiscal and monetary space to stimulate the economy, apart from continuing recession in the Eurozone area.
The agency also attached a caveat that its new growth projection saying this is contingent on a normal monsoon forecast and no further worsening of the Eurozone crisis.
Despite a massive drop in crude prices to the tune of nearly 18 percent, and a massive drop in global commodity prices, the agency also upped its inflation guidance to 7 percent from 6.5 percent.
The agency also upped its fiscal deficit target to 5.8 percent.
"We have lowered the GDP growth forecast for FY13 to 6.5 percent from its March 2012 estimate of 7 percent. The forecast has been scaled down in view of the rising downside risks from recession in the Eurozone,muted domestic investment demand, policy logjam, and limited fiscal and monetary space to stimulate the economy," Crisil Research sad in a noted this afternoon.
The agency further argued that "unlike the swift V-shaped recovery from 6.8 percent growth in the worst phase of the global financial crisis in 2008-09, economic growth will remain flat in 2012-13, the level of 6.5 percent achieved in 2011-12. This will make FY13 the second consecutive year of lowest growth in the past decade "Crisil managing director and chief executive Roopa Kudva said.
"Sub-normal monsoons and a further worsening of the situation in the Eurozone can create downside risks to our tepid growth forecast of 2012-13," warned Kudva.
The Crisil growth downgrade is the first from a domestic agency after the FY12 growth numbers were announced last Thursday and comes a couple of days after all the global financial majors like Goldman Sachs, Morgan Stanley, StanChart, Citi, CLSA, HSBC among others lowered the growth prospects to 5.7 to 6.4 percent for the current fiscal.
In their reports to clients worldwide, most of them blamed policy inaction by the government as the major roadblock to the economy, which had expanded by 8.4 percent for two consecutive years in 2009-10 and 2010-11, before plunging to 6.5 percent in 2011-12.
While Standard Chartered lowered its outlook to 6.2 percent from 7.1 percent, Morgan Stanley scaled down growth projection to as low a 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.
However, Crisil today said it sees industry growth improving to 5 percent over a very weak base of 3.4 percent growth last fiscal, while its revised downwards the services sector growth to 8.1 percent, reflecting the sluggish growth prospects in IT/ITES arising from the weak performance of the Eurozone, and slower-than-earlier-expected growth in domestic services due to moderation in private consumption. Under the assumption of normal monsoons, agriculture is expected to grow at the trend rate of 3 percent.
Raising its inflation guidance to 7 percent from 6.5 percent, Crisil said, "although lower economic growth will reduce demand-side pressures on inflation and lower global crude and commodity prices will have a moderating impact, these are likely to be offset by other pressure points.
"These include the weak rupee and continuing high levels of food inflation. Additionally, an upward revision in diesel, electricity, and minimum support prices of crops can heighten inflationary pressures depending on government decisions on these issues."
Moving up the rupee outlook to 50 from the earlier forecast of 48-49 by March 2013, Crisil chief economist Dharmakirti Joshi, said, "if the European situation improves towards the beginning of 2013, portfolio inflows into the domestic market will increase due to improved risk appetite, and resultant improved dollar supply will create a push the rupee up."
Joshi also hedged his hope on some easing in the current account deficit this fiscal due to softer commodity and crude prices, which will also support the rupee.
On the fiscal deficit, it said it settle at 5.8 percent of GDP in 2012-13 versus its earlier estimate of 5.5 percent and the government's budget estimate of 5.1 percent.
"With slower GDP growth, government revenue growth will be lower than previously anticipated, thereby pushing up the fiscal deficit. This will increase the government's borrowing requirement and push the yields higher than our earlier projection.
"Accordingly, we expect the 10-year G-sec yield around 8.0-8.2 percent by March 2013 as against 7.5-7.8 percent forecast earlier," Joshi said.
First Published: Monday, June 04, 2012, 19:03