Economy Update: An analysis of GDP growth forecasts for 2013-14
April 22, 2013
The pace of India’s economic growth has dropped significantly in the last three years. While this may seem like a blip in GDP growth that had been averaging around 8 percent in the pre-crisis years, its stickiness at around 6 percent in the last three has led many to believe that low GDP growth may be a new normal for India.
To validate some of this current thinking, we look at forecasts and projections from various global organizations, think tanks and banks, including the Reserve Bank of India, and the annual Economic Survey of India published by the Government of India.
Rationale and assumptions behind these estimates
Credit Suisse lowered India’s GDP growth forecast for 2013-14 to 6.9 percent from its earlier forecast of 7.2 percent in December 2012. Their reason, according to a note from the bank, is the delayed response from the RBI in cutting key interest rates to boost economic growth. The bank also acknowledges the fact that this revised forecast is still above other forecasts for 2013-14.
Reserve Bank of India
According to the results of the 22nd round of the Survey of Professional Forecasters published by the RBI in January 2013, the projected growth rate for 2013-14 was revised down to 6.5 percent from 6.6 per cent in the 21st round.
International Monetary Fund (IMF)
IMF, in its annual health check of the Indian economy with the Government of India, held in January 2013, warned the government against growing risks in the economy. It said that growth may decelerate further due to slowing investments, high inflation and populist fiscal expansion. The IMF also said external risks like the protracted slow growth in Europe and the likelihood of capital outflow from emerging markets pose serious challenges. Despite recent economic reforms like reducing subsidies on fuel and fiscal consolidation, it held that such changes present both upside and downside opportunities. On the upside, a faster pace of reform could entail higher growth. But on the downside, insufficient follow-through on these reforms could weigh heavily on the economic outlook for the country. It concluded by saying that India’s slowdown is driven more by domestic structural constrains rather than external factors.
Economic Survey of India
According to the Annual Economic Survey of India presented by Finance Minister P. Chidambaram in February 2013, the Indian economy is expected to grow by 6.1 to 6.7 percent. The survey reports that the economic downturn is more or less over and that the Indian economy is looking up. It also predicts global economic recovery in 2013 and says that various government measures should help in improving the Indian economy’s outlook for 2013-14.
Morgan Stanley and HSBC
On the other hand, Morgan Stanley lowered its growth forecast for India from 6.2 percent to 6 percent in March 2013. Its reasons for the revision were a lower-than-expected growth in the previous financial year at 5 percent and continuing challenges in the domestic and external environment.
However, the investment bank’s economist, Chetan Ahya noted that factors like moderating inflation, gradual monetary easing from the RBI and continued policy measures from the government, which should help stabilize private capital expenditure as a percentage of GDP, could boost growth. The bank also believes that the initial phase of recovery will be driven by an improvement in productivity growth as opposed to a big rise in investment.
Similarly, HSBC also lowered its growth forecast from 6.2 percent to 6 percent. According to a report by the bank, economic recovery in the economy is likely to be protracted due to “the lower than expected pace of stabilization in the economy”.
Asian Development Bank (ADB)
According to the ‘Asian Development Outlook 2013’, a report released earlier this month by ADB, the Indian economy could grow at an “improved” rate of 6 percent in 2013-14. The underlying assumptions behind this forecast, however, are continued reforms to fix structural bottlenecks in the economy, improved investment conditions and strong external demand to facilitate a turnaround in India’s worsening current account deficit (CAD).
According to the Bank’s Country Director Narhari Rao, supply bottlenecks and policy obstacles are India’s biggest barriers to growth. While Mr. Rao acknowledged some of the recent reform initiatives by the government, he reiterated the need for policymakers to remove structural hurdles for faster growth.
According to the recently conducted Reuters quarterly poll of 27 economists, India’s economic growth will remain subdued in 2013-14 and GDP growth will be around 6 percent. This is 0.4 percent below its poll results in January 2013. The international news agency also said that lack of policy initiatives from the government and weak demand for Indian goods and services abroad has been a major contributor to the slowdown. The Government of India announced a slew of reforms, including opening up of the multi-brand retail and aviation sectors to overseas investors. While these reforms brought back some investor confidence, domestic demand has been hurt by high inflation and interest rates, according to the international news agency, and it predicts that any recovery in the economy will be gradual.
Goldman Sachs expects India’s GDP to grow by 6.4 percent. This is one percentage point below its earlier forecast in November 2012. Like Credit Suisse, the investment bank acknowledges the fact that its forecasts are higher than other forecasts for the Indian economy. According to a research note by the bank, these projections come on the back of “easing financial conditions, in part driven by some reduction in policy rates, a continuation of reforms boosting confidence, and a normal agricultural crop’’. A continuation of structural reforms is also another important assumption underlying these views.