Joining the bandwagon, more economists slashed their economic forecasts for India today, with Citigroup, Goldman Sachs and CLSA cutting their outlooks for growth to 5.4 percent, 5.7 percent and 5.5 percent respectively in the fiscal year ending March, with a weak summer monsoon adding to economic headwinds.
India’s weather office earlier said that the south-west monsoon will be deficient by about 15%, indicating that a drought may be declared at the end of the season. It will be the country’s first drought in three years, though it is not a country-wide situation.
Citigroup said a policy gridlock, recent power outages, weaker exports and falling domestic consumption will take a toll on India while CLSA said it expected the farm sector to be stagnant compared with an average growth of 3 percent in previous years.
Economist Rohini Malkani said in a note that if drought conditions worsen, growth could fall to 4.9 percent.
RBI has already cut its GDP projection to 6.5 per cent for 2012/13 from the earlier estimate of 7.3 per cent.
“Unfortunately, the scope for counter-cyclical fiscal and monetary support today is almost non-existent,” wrote Rajeev Malik, economist at CLSA.
CLSA further dethroned India as the second-fastest growing nation in Asia, after China as it has been displaced by Indonesia and Philippines to fourth position. . In the absence of constructive policy response, further downside risk cannot be ruled out, it said.
Even Goldman Sachs revised its GDP growth forecast for FY13 down to 5.7 percent from 6.6%, not only due to the impact of a weak monsoon on agricultural output, but also due to a weaker investment outlook and continuing global
uncertainty. It added that a weaker monsoon will likely exacerbate the hit to business sentiment, which had already worsened. The latter is largely due to the lack of significant policy reforms, but also the challenging global environment. Moreover, a weak monsoon will impact rural consumption demand too.
“We are also revising our GDP growth forecast for FY14 down to 7% from 7.8% previously, due to a more tepid recovery in both consumption and investment demand, in part due to less monetary easing, and in part due to continued policy stasis,” it said in a note today.
Meanwhile, Nomura has asaid that rural demand is unlikely to slump, but rural consumption should moderate this year, largely because of the greater relative dependence of rural incomes on the non-agriculture sectors which now account for 62% of total rural GDP. With limited fiscal space to boost welfare spending. Consumption of consumer non-durables is at risk, it said.”We estimate that food grain output will contract by around 8% y-o-y in FY13 (year ending March 2013) compared with growth of 5.2% in FY12, because of a sharp moderation in summer crop output, dragging agriculture GDP growth to zero from 2.8%. We maintain our below-consensus GDP growth forecast of 5.8% in FY13.”
On Tuesday, rating agency CRISIL slashed its growth forecast to 5.5 percent for the fiscal year ending March, just two months after pruning its projection to 6.5 percent from 7 percent.
It said a weakening euro outlook along with poor rains contributed to the latest cut. It also revised downwards the March forecast for the rupee to 53 from its earlier 50.
“Given the worsening of the eurozone economy as well as domestic growth slowdown, we now expect the Indian economy to attract lower foreign capital inflows compared to our earlier estimate,” it said.
It said the biggest challenge for the government is boosting investor confidence, sustaining growth, especially demonstrating its ability to push through key reforms related to land, labour, taxation and government expenditure.
The RBI has been reiterating concerns over rising food prices alongside a high subsidy bill, which could worsen the fiscal deficit. The summer drought has put a question mark over the government’s ability to raise fuel prices.
With so many foreign institutions downgrading India’s growth to sub 6%, it needs to be seen whether policy action can prove them wrong.