Morgan Stanley cuts India's FY12 growth estimate

Thursday, 10 March 2011 00:02 - - {{hitsCtrl.values.hits}}

(Reuters) - Morgan Stanley lowered its growth forecast for India's GDP in the fiscal year starting April to 7.7 percent, its second cut since late January, saying it expects domestic demand growth to be slower than earlier estimates.

By comparison, the government said in its annual budget last week it expects India's economy to grow at 9 percent, plus or minus 0.25 percent, in the next financial year.

Morgan Stanley had in January scaled back expectations for economic expansion in Asia's third-largest economy to 8.2 percent in the year ending in March 2012, from 8.7 percent earlier. "While exports are likely to grow at a stronger pace, we do not believe it will be enough to offset the slower growth in domestic demand," economists Chetan Ahya and Tanvee Gupta Jain said in a note late on Monday.

The investment bank expects the central government to slow expenditure growth to single-digit levels in 2011/12, adding private consumption growth is also likely to moderate as higher inflation erodes purchasing power and higher rates encourage savings.

Many private economists have said India's budget plan to cut its fiscal deficit to 4.6 percent of GDP in the upcoming fiscal year, from an expected 5.1 percent this year, looks optimistic.

Pick-up in private corporate capital expenditure has been gradual due to concerns over global growth, higher inflation, corruption-related investigations and a rise in the cost of capital, Morgan Stanley said.

Indian food inflation eased in mid-February following a drop in prices of vegetables and milk, but high headline inflation is expected to keep the pressure on the central bank to raise interest rates this month.

The wholesale price index , the country's main inflation gauge, rose to 8.23 percent in the year through January, more than the 8.05 percent forecast in a Reuters poll. But the rise was weaker than an 8.43 percent increase in December's data. Morgan Stanley also cut its growth forecast for fiscal year 2012/13 to 8.7 percent from 9 percent.

It said the current growth challenges that India is facing are cyclical.

"We believe that India will be back to transitioning toward higher sustainable growth of 8.5-9 percent from F2013 (FY13) onwards," the economists wrote in the note.