CRISIL cuts India’s GDP growth forecast to 5.5% from 6.5%

CRISIL Research cited adverse impact of rainfall deficiency and worsening Eurozone outlook for the downgrade

 

CRISIL Research has cut India's real GDP (gross domestic product) growth forecast for 2012-13 to 5.5% from its earlier forecast of 6.5%. The downward revision in India's growth forecast factors in the adverse impact of rainfall deficiency (an expected deficiency of 15% for June-September 2012 monsoon season, as per Indian Meteorological Department) and worsening of the Eurozone growth outlook. 

 

Despite slowing growth, the research agency has revised up its average WPI inflation forecast for 2012-13 to 8% from 7% released earlier, to reflect the adverse impact of deficient monsoon on food inflation.

 

The revised growth forecast assumes that the stretched fiscal situation will limit the ability of the government to give a generous stimulus to the economy. If it does so, then growth will go up but so will the fiscal deficit. Similarly, high inflation will tie the hands of the Reserve Bank of India (RBI) in aggressively cutting rates to stimulate the economy.

 

The revised growth forecast does not take into account any substantial fiscal stimulus that may be provided to the economy to arrest and reverse a growth slowdown. A fiscal stimulus may create some upside to industrial and services growth. Upside to growth can also arise from sorting out policy-related issues in mining and power sectors.

 

According to the IMD, rainfall for the south-west monsoon season is likely to be around 15% deficient, close to the 20% deficiency recorded in June-July. Even if there is a partial recovery in rainfall in the coming weeks, an overall deficiency of 15% would imply that 2012-13 will end up as a drought year and will result in a substantially lower sowing not only in the Kharif season, but will also adversely influence the Rabi crop. As a result, agriculture GDP would not grow this year and would record 'zero' per cent growth compared to CRISIL's earlier estimate of 3% under the assumption of normal monsoon.

 

On the global front, CRISIL's forecast takes into account the worsening of the Eurozone economy. According to S&P's revised forecast, the Eurozone economy will shrink by 0.6% in 2012 compared with the previous forecast of 'zero' per cent growth. The deterioration in the economic outlook for Europe, including a recession-hit UK, implies that India's IT/ITES sector, which exports around 20%-25% of its exports to the region, will experience a slowdown. India's merchandise exports (clothing, iron & steel, electronics and gems & jewellery) too will decelerate further (Eurozone accounts for 15% of India's total exports).

 

While the growth forecast has been revised downward, WPI inflation forecast has been revised up to 8% to reflect the higher-than-anticipated increase in food inflation. Besides, a weak rupee will continue to offset the gains from lower global crude oil, commodity and metal prices, and keep the cost of imported items high. On the flip side, lower GDP growth in both India and the Euro zone will result in a decline in manufacturing inflation. The flaring up of food inflation will, however, raise inflationary pressure.

 

The lower GDP growth will impact government revenue growth, which would be lower than estimated earlier. This is expected to push up the fiscal deficit forecast to 6.2% from the earlier forecast of 5.8% of GDP. This deficit forecast does not take into account any substantial stimulus that may be given to the economy to boost growth. Given the higher fiscal deficit and, consequently, higher government borrowings, the pressure on the 10-year G-sec yield would remain high. "We expect the yield at around 8%-8.2% by March-end 2013, even if the repo rate is cut by further 75-100 basis points by the RBI in the rest of the fiscal year", CRISIL Research said in its report.