The downward revision of the gross domestic product (GDP) growth forecast has been done on account of rising cost of funds due to inflation, creeping sluggishness in investments and consumption expenditure and government spending.
In a recent report, Morgan Stanley said high inflationary pressures, prevalent corruption, high interest rates and poor market sentiment were negatively affecting the investment demand. “Cyclically, this will lead to fewer job creations and lower consumption expenditure. Unemployment and erosion of purchasing power due to inflation will ultimately curtail private consumption expenditure, thereby hurting the GDP growth,” it said in the report. “Passenger car sales growth has decelerated to 5.4 per cent year on year as of June 2011 from 25 per cent as in March 2011,” it added, clearly showing a fall in private spending.
Government spending, which played a crucial role in reviving consumption spending during the crises years of 2008-09, is slowing to meet the predetermined fiscal deficit target of 4.6 per cent of the GDP. Lower public expenditure along with fewer revenues in the exchequer’s kitty is also likely to reduce the demand by rural households as well.
The consolidated fiscal deficit projected is also 0.5 percentage point above the consolidated fiscal deficit of 7.8 per cent for the financial year 2011.
“Even after the targeted reduction of expenditure to GDP, the consolidated fiscal deficit would remain high at 8.3 per cent of GDP in the financial year 2012,” the report said.
The absence of windfall revenues as in the case of 3G auction and tax cut amounting to nearly 0.5 per cent of GDP has put pressure on the government’s coffers.
The report also points out a fall in exports is likely in the coming months due to the instability in the Euro zone and unresolved US debt crisis will lead to downward growth trajectory. In the absence of growth revival, non performing assets will increase, leading to reduced advances by the lender leading to further stagnation, the report said.
Suggesting a two-pronged strategy for boosting growth, Morgan Stanley said, "Quickening the pace of policy reforms and fast-track approval of 25-30 core projects by empowered group of ministers led by the prime minister can help kick start investment cycle." (End)