3 foreign agencies cut FY14 GDP forecasts to 4-4.2%

Recovery 'unlikely' till the fourth quarter of the current financial year

Foreign agencies CLSA, HSBC and Nomura have downgraded their gross domestic product (GDP) growth estimates for India after the economy grew lower-than-expected in the June quarter. While HSBC cut its GDP estimates for the country for the current financial year from 5.5 per cent to 4 per cent, CLSA and Nomura lowered their growth expectations from 5 per cent to 4.2 per cent.

“The risk of a pro-cyclical fiscal and monetary policy tightening is rising and the downside risks to our growth outlook have materialised with financial conditions tightening much more than anticipated,” said Sonal Varma, economist at Nomura in a client note, retaining the brokerage’s negative outlook for the economy over the next three to six months.

India grew at 4.4 per cent in the first quarter (April-June) of 2013-14 — its slowest pace in four years —against 4.8 per cent during January-March.

HSBC said it does not expect to see signs of recovery till the fourth quarter of 2013-14.

“Even then, the recovery is likely to prove protracted, as confidence will only return reluctantly and the structural reforms will only pass through to growth very slowly,” said Leif Eskesen, chief economist for India and Asean, HSBC, in a client note.

The recent reform announcements are yet to translate into action on the ground. The Reserve Bank of India (RBI) had taken steps to stabilise the rupee, raising funding costs and making consumers and businesses more cautious about spending due to uncertain economic prospects. HSBC said these factors would weigh on growth in the months ahead.

“...The RBI will not be able to roll back its liquidity tightening measures anytime soon and might even be forced to consider further tightening,” said Eskesen. “In addition, it will be a while before we see the investment projects expedited through the Cabinet Committee on Investment (CCI) breaking ground,” he said.

Worries about an economic slowdown have resulted in the rupee slumping 20 per cent against the dollar and stock indices dropping close to five per cent so far in 2013.

“The bigger downward adjustment in the growth forecast trajectory takes into account the double whammy from the tight liquidity conditions and the need for fiscal sanity,” said Rajeev Malik, economist at CLSA.

Nomura expects pressures on balance of payments (BOP) to continue over the next three to six months, which could push up inflation, increase short-term funding costs and lead to waning confidence.