Morgan Stanley cuts growth forecast, but India optimistic

Blaming a misguided policy approach for the steep fall in India's growth momentum, global investment bank Morgan Stanley has scaled down its fiscal year 2012-13 growth forecast to 5.8 per cent. The New York-headquartered bank had earlier projected India to grow at 6.3 per cent for the current fiscal.

Chetan Ahya, chief economist for Asia Pacific at Morgan Stanley, said the much-talked about consumption story in the country is being supported by high fiscal deficit, while elevated rates have resulted in a decline in private investments, which is "not sustainable".

The bank has downgraded its growth forecast for the current fiscal after India's March quarter growth slowed down to the lowest in nine years at 5.3 per cent.

Morgan Stanley's downward revision comes on the back of similar downgrades by leading global banks such as Goldman Sachs, Standard Chartered, Citi, HSBC. Brokerages like CLSA and the domestic ratings agency Crisil, too, have revised downwards their growth forecasts for the country.
However, Kaushik Basu, India's chief economic advisor defended the economic situation saying the short terms prospects might be tough, but medium to long term prospects are bright for India.

“I am expecting FY13 GDP to grow to 7.6 per cent,” Basu said.

Morgan Stanley expects the Reserve Bank to cut rates by a further 1 per cent till March 2013 to support growth. Ahya said the RBI move in April, when the central bank cut the repo rate, has not resulted in a lowering of the real cost of borrowings. A reduction in cost of capital will alone spur growth, he said.

Ahya argued that the high growth phase between 2003 and 2007, which saw the economy growing at over 9 per cent annually, was led by private investment, unlike the consumption-led growth which the country is relying on right now.

Ahya said the rupee will continue to trade around 56 to a dollar in the near-term and appreciate to Rs 52 by the year-end. The rupee has seen a sharp depreciation of over 23 per cent over the last 12 months and is the worst performing currency in Asia.

Currencies in emerging markets might see a sharp appreciation in the medium term once the US embarks on a new round of quantitative easing, Ahya said.

FDI flows will be lower in the current fiscal than the year ago, when the country recorded a record $51 billion in foreign fund inflows, he added.

At 6.6 per cent, the bank is more optimistic about growth in the next fiscal (2013-14) on the back of improvement in the overall global macroeconomic situation.


(With inputs from PTI)