FIIs cut India growth forecast on slew of negatives

Finance minister Pranab Mukherjee has put on a brave face and stuck to a GDP growth forecast of 7.6% in FY13. But many economists at leading brokerages remain skeptical.

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Economists at three top institutional brokerages have cut India's GDP growth forecast and even questioned whether last year's expected rate of 6.9% will be managed.

Bank of America-Merrill Lynch has reduced India's FY13 GDP forecast by a further 30 basis points to 6.5% and warns that growth may even fall to 5.5%, in case of a disorderly Greek exit from the European Union.

However, BofA-Merrill Lynch adds, "We continue to believe that the worst is over, but there is still pain left. Assuming a normal monsoon, growth will likely stagnate about 6% till September. It should recover to 7% levels in second half of FY13 on lending-rate cuts and base effects."

Goldman Sachs has also reduced its India growth forecast. "We are revising our GDP growth forecast for FY13 down to 6.6% from 7.2%, largely due to a weaker investment outlook in part driven by domestic policy uncertainties and more back-ended and lesser monetary policy easing and in part by prevailing global uncertainties."

Goldman Sachs has also revised the FY13 WPI forecast to 6.5% from 5%, citing higher food prices and a rise in domestic fuel prices. "We are reducing our rate cut forecast to 50 bps in 2012, to occur in fourth quarter of 2012, from 75 bps earlier, due to higher inflation in the near term. We, however, continue to think that weaker core inflation and sustained weakness in activity will allow RBI space to cut rates in fourth quarter of 2012."

Meanwhile, Morgan Stanley blames the government's decision to continue with a bad mix of growth for most of India's macro-economic challenges. "The duration of the slowdown in growth is likely to persist for longer than initially expected, with growth likely to remain in the 6.0-6.5% range for six quarters in a row."

"For 2013, we are cutting our growth estimate to 6.8% from 7.5% previously. On a financial-year basis, we have reduced our GDP growth estimates to 6.3% in FY13 and 6.9% in FY14 from our earlier estimates of 7% and 7.5%, respectively."

However, even with this slow rate, India will remain the second-fastest growing country among the BRIC nations. And that is small consolation indeed.