Economic prospects less rosy than forecast: Moody’s

April 23rd, 2009 - 4:57 pm ICT by IANS  

New Delhi, April 23 (IANS) Indian economy’s growth prospect is less rosy than the official forecast, the economic arm of rating agency Moody’s said Thursday.
“India’s economy is facing strong downside risks, but the official growth forecasts remain relatively optimistic,” Sherman Chan, economist with Moody’s said.

“GDP growth already slowed to 5.3 percent year on year in the December quarter, and the slowdown likely worsened in the opening three months of 2009. This makes the Reserve Bank of India’s fiscal 2008-2009 growth estimate of 6.5 percent to 6.7 percent and the government’s projection of ’slightly below’ 7 percent a little too upbeat,” Chan said.

Moody’s expects economic expansion to have decelerated to around 4.5 percent year on year in the March quarter, which should take annual growth to about 6.3 percent.

For fiscal 2009-2010, India will likely grow by about 5 percent, as the rest of 2009 will continue to be tough amid few signs of improvement in the global economy.

The Reserve Bank of India (RBI) forecast of 6 percent essentially implies that India has either already seen the trough of the current cycle or will experience a sharp rebound in late 2009 to early 2010, she said, adding: “Either scenario is unlikely, as businesses will invest more cautiously after this long and severe global downturn.”

Chan said RBI’s “relatively optimistic” view may have contributed to this week’s smaller than expected interest rate cut.

“The modest reduction of 25 basis points to the repo rate will likely have an insignificant effect on commercial rates. A cut of at least 50 basis points is needed in the current environment. India’s outlook is still dim, although contraction is not a concern. Provisional foreign trade data showed exports continued their free fall in March.”

Noting that India is not as trade-dependent as its Asian neighbours are, she said a slump in exports should still noticeably dampen other aspects of the economy. “For instance, industrial production has been sliding, and there are no signs of improvement. This in turn is weighing on labour markets, especially in manufacturing.”

Chan said outsourcing business volumes have also fallen, prompting some companies to consider moving certain functions back home. According to her, the key factors keeping India’s outsourcing industry afloat are its workforce’s low wages and good technical knowledge.

The economist said though the fiscal stimulus packages have been widely regarded as insufficient to stimulate the economy, the government may have already stretched its budget close to the limit.

“Policymakers could inject more money, but this would eventually come at the expense of the economy, as excessive fiscal debt is a drag on business confidence,” she added.

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