S&P further cuts India growth forecast

Says not sure on implementation of reform measures, particularly multi-brand retail foreign direct investment as well as disinvestment

Global ratings agency Standard and Poor’s (S&P) on Monday cut projections for India’s gross domestic product (GDP) growth to 5.5 per cent for 2012-13 from its earlier estimate of 6.5 per cent.

And, it said, this could even slip to 4.3 per cent, despite the flood of reform policy announcements in the past couple of weeks. The rating agency was not sure on implementation of reform measures, particularly multi-brand retail foreign direct investment as well as disinvestment. If these steps were implemented, it would help India's economy in medium to long term, it said.

The rating agency has already put India on its radar for a possible cut in the sovereign rating to junk grade.

GROWTH VIEW
S&P	(%)
Earlier forecast 2012-13	6.50
Present	5.50
2013-14	6.50
2014-15	7.00
Latest GDP growth  forecast for 2012-13
Source	GDP (%)
Budget 2012-13  (Ministry of Finance)	7.6
RBI	6.5
Moody's Analytics	5.5
Morgan Stanley	5.8
Crisil	5.5
CLSA	5.5
Citi	5.4
PMEAC	6.7
*Q1 GDP	5.5
All figures in per cent; * Actual GDP growth Source: Company websites, government

 

The projections clash with the optimism of the government that the economy would grow at a faster rate in the second half of this financial year, to deliver 6.5-6.7 per cent growth for the full year. The growth was 5.5 per cent in the first quarter. In the best case scenario, S&P estimates India's economic growth rate to be 5.6 per cent in 2012-13.

In response, C Rangarajan, chairman of the Prime Minister's Economic Advisory Committee, said he disagreed and stuck to the body’s estimate of a 6.7 per cent expansion this year. The economy grew 6.5 per cent in 2011-12.

S&P attributed its decision to cut growth projections to “potential investors becoming critical of India’s policy and infrastructure shortcomings.” It said these were highlighted by the national electricity grid failure in early August. The government is soon expected to take measures on these fronts, too. Cautious investor sentiment globally has seen potential investors become more critical of India's policy and infrastructure shortcomings, said the report. “The latter was recently highlighted by the power outage in early August that affected 20 of India's 28 states,” it added.

The rating agency also cited the “lack of monsoon rains” for its lower estimate of India's economic growth.The government estimate, released on Monday, on kharif foodgrain is that this is expected to drop by at least 10 per cent due to uneven rain in the initial part of the southwest monsoon season. The biggest drop is in pulses, coarse cereals and oilseeds; these might increase the food import bill.

The report came a little over a week after the Cabinet’s big-bang policy announcements on opening multi-brand retailing to foreign direct investment, easing norms in single-brand retail, allowing foreign airlines to invest 49 per cent in Indian airlines, raising diesel prices by Rs 5 a litre and capping the cooking gas subsidy to narrow the fiscal deficit.

It is also expected to overhaul retrospective amendments to the Income Tax Act and defer the General Anti-Avoidance Rules in this regard.

Economists say the recent reforms might not have any immediate impact on growth or inflation.

“A 5.5 per cent estimate is (still) a very decent one and all these reforms would surely create an enabling environment and push up investors’ sentiment, but its impact on growth will only be seen in due course of time,” said Madan Sabnavis, chief economist, CARE Ratings, who pegged India’s GDP growth at 5.8-5.9 per cent for 2012-13.

Though not giving reasons, S&P did talk of better economic growth in the next couple of years — 6.5 per cent in 2013-14 and seven per cent in 2014-15. However, it also said that in a worst case scenario, the growth could decelerate to 5.1 per cent in 2013-14.

Rangarajan maintained S&P's assessment was incorrect. “I think growth will pick up in the second half of the year and there are indications for that,” he said.

At an education institution in Chennai, he said the average annual rate of growth in the next five years would be 8.2 per cent. The Planning Commission had already lowered its estimate of India's growth projections to this level, from the earlier nine per cent for 2012-13 to 2016-17 (12th five-year Plan).

Earlier this year, S&P had cut India's sovereign rating outlook to negative, implying this could be downgraded further, to junk grade. Later, in July, it said India might be the first to witness a cut in ratings among the BRICS (Brazil, Russia, India, China, South Africa) countries.

At the time, it had not given estimates for GDP growth. India currently has a BBB- rating on the S&P scale, the lowest investment grade.

"Setbacks or reversals in India's path towards a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," S&P credit analyst Joydeep Mukherjee had said at the time.

On Monday, the agency said economic conditions in the Euro zone would increase contagion risk for the Asia-Pacific, given the region's sensitivity, particularly of the open economies', to capital flows and trade. Within that context, the credit conditions for rated portfolios in the Asia-Pacific remained mixed.

It said the top risks for the region included contagion from the Euro zone and a weakening of the US recovery, with both possibilities rising. However, the possibility of an oil supply shock is on a decline.