BNP Paribas cuts growth forecast to 3.7%

On a day the rupee recorded its biggest intra-day fall, slipping to 68.80 against the dollar, global ratings major Standard & Poor’s said near-term prospects will be tough for emerging economies, such as India, which has the largest current account deficit in Asia.

S&P and other rating agencies, such as Fitch and Moody’s, are keeping a close watch on the rapidly changing situation in India.

Fitch has already warned that further fiscal slippage could lead to negative rating action. Currently, India’s rating is just a notch above junk investment grade.

Any downgrade will make overseas fund raising by the Government and India Inc expensive.

A downgrade is possible if the Government fails to contain the fiscal and current account deficits. Though the Finance Minister has maintained that the 4.8 per cent of GDP target for the fiscal deficit and 3.7 per cent of GDP target for the CAD will be met, there is fear that the bleeding rupee will add to the subsidy and import bills, resulting in a negative impact on both deficits.

With dark clouds looming over the economy, French financial services major BNP Paribas has lowered its growth forecast for India to 3.7 per cent from 5.2 per cent earlier, saying the situation was fast approaching crisis proportions. This is the latest in a string of pessimistic forecasts, starting with the Reserve Bank of India itself on July 30 cutting the growth projection for 2013-14 to 5.5 per cent from an earlier estimate of 5.7 per cent.

Early in August, the ADB pared the growth forecast to 5.8 per cent in calendar 2013 from six per cent estimated previously, citing the slow progress of economic reforms. Then, global financial services firm Credit Suisse lowered its growth estimate for this fiscal to six per cent from 6.5 per cent, and for financial year 2014-15 to seven per cent from 7.5 per cent earlier.

Don’t Panic: Govt

In 2012-13, India’s economic growth slipped to a decade’s low of 5 per cent. The growth rate in the fourth quarter ended March 31 stood at 4.8 per cent compared with 4.7 per cent in the third quarter of 2012-13.

Trying to improve sentiment and assuage investors, Economic Affairs Secretary Arvind Mayaram was quoted by agencies as saying: “This is an irrational sentiment. It will correct itself. It is important to stay on the course. There is no need to panic.”

As the Government fought a losing battle to shore up the rupee, Singapore-based DBS Bank said: “The string of recent policy action might only help to manage the pace of depreciation and limit volatility rather than reverse the course of the currency.

The slowdown is beginning to be felt across the economy, India Inc has been hit the hardest by a dip in demand and a rise in costs because of the sinking rupee. It has been demanding action from the Government to act quickly to stem the currency’s rot.

(This article was published on August 28, 2013)
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