StanChart cuts India's growth forecast to 5.4% for this fiscal
Standard Chartered Bank on Monday lowered India's growth forecast for this fiscal year to 5.4 percent from 6.2 percent projected earlier despite the recent reforms push.
New Delhi: Standard Chartered Bank on Monday lowered India's growth forecast for this fiscal year to 5.4 percent from 6.2 percent projected earlier despite the recent reforms push.
"We revise our FY13 GDP growth forecast sharply lower to 5.4 percent from 6.2 percent - despite the better-than- expected Q1-FY13 GDP print of 5.5 percent y/y," Standard Chartered said in a research note.
The first quarter of this fiscal year saw a GDP growth of 5.5 percent which was marginally better than expected. However, going forward India is likely to register sub-5 percent GDP growth in the forthcoming quarters for the rest of the fiscal year.
According to the report, the series of recently announced government reforms will contain the fiscal deficit and increase foreign participation in selected sectors but "India's macro backdrop remains challenging".
"While these measures will have a positive medium-term impact and will change the perception of policy paralysis in India, they may not have an immediate effect on growth. It will be important to maintain the reform momentum in order to put growth back onto an upward trajectory," the report added.
In big ticket reform measures, the Cabinet Committee on Political Affairs on Thursday decided to hike diesel prices and put a cap on supply of subsidised LPG cylinders. On Friday, the Cabinet and CCEA cleared FDI in multi-brand retailing and in Indian airlines as well as disinvestment in four PSUs.
The spate of reform measures are likely to change the perception of policy paralysis among investors and rating agencies, and could revive business sentiment and attract equity inflows in the near term, but the reform process should continue, it said.
"The reform process needs to continue, and there is no room for complacency. The government has provided a positive surprise to the market with the latest round of reforms, which change the perception of policy paralysis in India. It is now crucial to keep the reform momentum going so that growth can return to an upward path." it said.
Earlier this month, Morgan Stanley had also lowered India's growth forecast to 5.1 percent for the current fiscal, from its earlier estimate of 5.8 percent and HSBC has cut India's growth forecast for this fiscal year to 5.7 percent from 6.2 percent projected earlier.
According to the report, while industrial growth has stalled, the services-sector growth - which has significantly lost momentum, is likely to remain low for a while.
Moreover, the agriculture sector could also suffer from delayed monsoon rains this season.
"While these measures will have a positive medium-term impact and change the perception of policy paralysis, they may not have an immediate effect on growth. It will be important to maintain the reform momentum to put growth back onto an upward trajectory," the report said, adding the asset markets are likely to respond to these steps positively.
On the industrial slowdown, it said growth has turned anaemic industrial, excluding construction. Construction activity, which has been at the highest level in the past 17 quarters, is the key reason for the better-than-expected Q1 numbers, the report said, adding delayed monsoons probably helped the sector, bucking the seasonal trend.
The report does not see the overall GDP prints getting any support from the industrial sector, which grew an average rate of just 0.8 percent in the past three quarters, saying lack of steps to expedite the approval process for investment projects has dimmed hopes of an imminent revival in activity, although a technical rebound from a low base is likely.
"We expect industry to grow 4.1 percent in FY13, driven primarily by the construction sector. The lack of support from the Government or RBI (it expects first rate cut only in Q1, 2013) is also likely to keep other segments such as mining and manufacturing on a weaker footing."
On the services sector, which contributes about 60 percent to GDP, it said though previously it has been consistently supporting growth, it has buckled under the pressure of weaker industrial activity.
From 10.2 percent in Q1 of last fiscal, the services sector slowed progressively to 8.9 percent in Q3 of FY12, 7.9 percent in Q4 of -FY12 and 6.9 percent in Q1 of this fiscal.
The latest slowdown has been driven primarily by domestic trade (retail and wholesale), which slumped to 4 percent from 7 percent in Q4 of last fiscal and 10 percent in Q3 of last FY12.
"Therefore, we expect the services sector to remain in a slump for most of FY13 and may remain at 6.9 percent," the report added.