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BNP cuts India's GDP forecast to 3.7%

August 28, 2013 17:14 IST

BNP cuts India's GDP forecast to 3.7%

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Financial services major BNP Paribas on Wednesday cut India's GDP growth forecast for the current fiscal to 3.7 per cent from 5.7 per cent earlier, saying the country's 'macro muddle' is fast approaching crisis proportions.

Citing plunge in capex demand and industrial production, BNP said the economy appears to be entering a "tailspin" as business confidence collapses under the weight of rapid rupee depreciation, rising energy costs, sharply tightening financial conditions and policy confusion.

"India's 'macro muddle' is fast approaching crisis proportions... we now expect the palpable downside risks facing the Indian economy to largely crystallise over the next 6-9 months.

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Image: A child plays with Indian national flag while lying in hammock in a slum in Chandigarh.
Photographs: Ajay Verma/Reuters

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BNP cuts India's GDP forecast to 3.7%

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"We accordingly now target GDP growth of just 3.7 per cent in FY'2014 (previously 5.2 per cent)," it said.

This 3.7 per cent is not only easily the lowest forecast, but would represent the lowest annual growth since 1991-1992, it added.

India's GDP fell to a decade low of 5 per cent in 2012-13. The French banking major said prospects for 2014-15, "which feels a long way off at present", are more propitious.

The more competitive rupee should allow a recovery in industrial production and export growth while RBI should be able to reverse quantitative tightening and eventually resume policy ease, it said.

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Photographs: Reuters

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BNP cuts India's GDP forecast to 3.7%

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"Next year's general election is necessarily a huge 'wild card'. At present, we target GDP growth of 5.3 per cent for FY'2015," said the BNP Paribas' report by its Chief Asia Economist Richard Iley.

It said RBI's "ill-judged quantitative tightening" has failed to staunch the selling pressure on rupee.

Downward pressure on asset prices is unlikely to abate until the rupee becomes decisively cheap (may be USD/INR above 70) or the authorities deliver "shock and awe" tightening, it added.

In a series of notes, BNP has been highly critical of India's macro-policy formation, which, in its view, has "unhelpfully" compounded the stresses facing the economy and the rupee.

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Photographs: Reuters

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BNP cuts India's GDP forecast to 3.7%

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"The beatings will continue. RBI's quantitative tightening campaign, in our judgement, has been at best premature and, at worst, wholly injudicious," it said.

BNP said with persistently loose fiscal policy, rather than too low interest rates, "the root cause" of India's uncomfortably large current account deficit and the recent

liquidity squeeze is the "wrong solution to the wrong problem and risks proving entirely counterproductive".

It also said the new RBI Governor Raghuram Rajan, who will take charge on September 5, faces a tricky inheritance as he wrestles with the "time inconsistency" problem generated by the central bank's conflicting policy objectives. 


Image: Raghuram Rajan
Photographs: Reuters

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