Goldman Sachs lowers India’s growth forecast to 6.7 percent

November 10th, 2008 - 2:44 pm ICT by IANS  

New Delhi, Nov 10 (IANS) A day after Prime Minister Manmohan Singh said India’s growth may come down “somewhat” this fiscal, Goldman Sachs lowered its forecast to 6.7 percent from the earlier 7.5 percent on account of the impact of global financial crisis.The leading investment banker and corporate consultancy has also revised the growth numbers for the next fiscal to 5.8 percent from 7 percent, in a clear sign that the global slowdown is impacting India more seriously than predicted earlier.

“The larger-than-expected shock to the financial sector over the past couple of months and its knock-on effects on both domestic and external demand are responsible for our lower growth projections,” the investment banker said.

“We believe there is little fiscal room for additional stimulus in financial year 2009-10,” it said, adding: “We look at the impact on corporate, bank, household and government balance sheets, and negative feedback loops.”

The comments came after Manmohan Singh, during a two-nation tour of Gulf nations, said in Muscat Sunday that the global financial crisis was expected to hit the Indian economy more than previously anticipated.

“Due to the current international economic and financial situation, our growth rate may slow down somewhat next year. However, we still hope to achieve a growth rate of 7-7.5 percent next year,” he told a gathering of Indian expatriates.

The Goldman Sachs said further downside to growth could be limited by the large monetary policy stimulus by the central bank, the prospects of good agricultural crop supporting rural demand, lower commodity prices, and ongoing infrastructure spending.

“Corporates will be the most affected, and, as a result, investment demand will suffer the most, followed by external demand, and finally by a slowdown in consumption,” the investment banker said.

“On the production side, we expect a significant slowdown in construction and real estate, and in industry.”

The consultancy said it saw Indian firms facing substantial headwinds due to the troubles in the financial sector and the balance sheets being impaired and their credit-worthiness being affected by the following four reasons:

- The sharp declines in the equity market that has wiped out $850 billion in market capitalization since the peak in January to make it difficult to raise new capital

- The drop in market valuation of capital that had made the corporate sector not to go for new capital and also postpone investment decisions

- The losses from foreign exchange derivatives for significant number of firms due to the large weakening of the rupee

- Accumulation of losses because of the large exposure to the realty and stock markets by a large number of companies

“We think the problems will be compounded by the shutting off of the equity market channel and external financing,” the report said, adding Indian firms had raised $22 billion from the equity markets and $40 billion externally during 2007-08.

“As these sources dry up, pressures on domestic credit will become more acute. The small and medium enterprises stand to face the most acute stress. Since they are key for employment generation, the knock-on effects will be significant.”

Goldman Sachs also expected Indian banks to continue to face sizeable headwinds, given the origin of the current crisis lies in the financial sector, apart from affecting households, especially due to the decline in stock valuations.

“The slowdown is very much a cyclical phenomenon. However, to prevent a further deterioration requires considerable policy dexterity, a timely disposal of bad assets, especially in real estate, and for scarce capital to be reallocated quickly and efficiently.”

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