In light of the dampening business sentiments, sluggish domestic industrial growth, intensifying macroeconomic headwinds and the likelihood of lower monthly merchandise exports in second half of FY11-12, ICRA has revised its forecast for the pace of GDP growth in FY 11-12 to 7.3%-7.5% from the earlier expectations of a 7.5%-7.7%
Mumbai: Ratings firm ICRA on Monday revised downward its growth projection for the Indian economy to 7.3%-7.5% for this fiscal on the back of dampening business sentiment and sluggish industrial growth, reports PTI.
“In light of the dampening business sentiments, sluggish domestic industrial growth, intensifying macroeconomic headwinds and the likelihood of lower monthly merchandise exports in second half of FY11-12, ICRA has revised its forecast for the pace of gross domestic product (GDP) growth in FY 11-12 to 7.3%-7.5% from the earlier expectations of a 7.5%-7.7%,” the firm said in the latest report.
This is the lowest projection so far as the forecasts from the government, the Reserve Bank of India (RBI), CMIE and Crisil stand above or at 7.6%. The Indian economy had expanded by 8.5% in the last fiscal (2010-11).
ICRA said the GDP growth in the second quarter (July- September) is likely to be a modest 7% because of easing of manufacturing growth, contraction in mining and quarrying output and moderation in the services sector. The Q2 growth data is scheduled for release on 30th November.
GDP grew at 7.7% during the first quarter of the current fiscal, the lowest in 18 months.
Industrial output also showed signs of slowdown with growth in factory output rising by a meagre 1.9% in September, which was the lowest monthly rate of expansion in two years.
Experts have blamed the high interest rate regime, which has increased the cost of borrowing, for hindering fresh investments and leading to a fall in industrial output.
The RBI has hiked its lending rates 13 times, totalling 350 basis points, since March 2010 to curb inflation.
Headline inflation has been above the 9% mark since December last year and stood at 9.73% in October this year.
The government and RBI have conceded that the high interest rate regime is hurting growth but reiterated that inflation control in the biggest priority.
ICRA said it expects inflation to moderate to around 7% by March 2012, in line with RBI’s projections.
“ICRA expects headline inflation related to the Wholesale Price Index (WPI) is likely to have peaked and would decline to around 7% by March 2012, unless commodity prices increase sharply in the coming months,” it added.
The ratings firm, however, warned that any further depreciation of the Indian rupee beyond current levels would exacerbate inflationary pressures.
The rupee has depreciated by over 15% in the past three months against the US dollar. This has become a matter of concern as a weaker rupee makes import expensive and India depends on imports for over 80% of crude oil needs.
Warning that the next fiscal may also be tough, ICRA said, “While the execution of ongoing projects and healthy order books may support growth in the current year, investment growth is likely to moderate substantially in FY 12-13 unless policy issues are addressed and there is a substantial pick up in the pace of implementation of big ticket economic reforms.”
ICRA has also warned that the government will not be able to meet the fiscal deficit target of 4.6% and said it will shoot up to 5.5%. The fiscal deficit in first half of FY 11-12 has reached 68% of the Budget estimates for the year.
“Given the anticipated moderation in growth of tax revenues, low likelihood that government of India would meet its disinvestment target and the additional expenditure proposed under the two Supplementary Demands for Grants, ICRA expects the fiscal deficit for FY 11-12 to worsen to around 5.5% of GDP,” the report said.
It added that considering the prevailing market conditions, the government is likely to fall considerably short of its disinvestment target of Rs40,000 crore in the current fiscal.
While almost eight months of the fiscal has passed, the government has been only able to mop up a little over Rs1,100 crore through the follow-on public offering of Power Finance Corporation.
Although the fiscal policy remains expansionary, higher outgo towards items such as subsidies (particularly fuel) and salaries (reflecting higher DA), limit the fiscal space available for boosting infrastructure spending to support investment growth, the rating agency warned.
On the global front, it said the economic environment remains bleak owing to the deepening sovereign debt crisis in Europe, impacting global trade and financial flows.
The report warned that the rupee fall may only help maintain the competitiveness of merchandise exports, demand for which is likely to suffer in light of the uncertain growth outlook for the advanced economies.