Financial services major BNP Paribas on Wednesday cut India's GDP growth forecast for this fiscal to 3.7% from 5.7%, saying the country's 'macro muddle' is fast approaching crisis proportions.
Citing a 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 rupee depreciation, rising energy costs, 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 six-nine months. We accordingly now target GDP growth of just 3.7% in FY14,” it said.
This 3.7% 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% in 2012-13. BNP said prospects for 2014-15 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. “Next year's election is necessarily a huge 'wild card'. At present, we target GDP growth of 5.3% for FY15,” said 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 above 70) or the authorities deliver “shock and awe” tightening, it added.