StanChart discounts reforms, lowers GDP forecast to 5.4%

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Despite the rash of reform steps announced over the weekend, Standard Chartered India on Monday sharply lowered its GDP growth forecast to 5.4 per cent for FY'13 from 6.2 per cent earlier, citing slowing consumer demand, an anaemic industry and a weak services sector.

The foreign bank also said the latest reform measures will have only long-term impact.

"We revise down our GDP growth fore cast for FY13 to 5.4 per cent from 6.2 per cent earlier as investment activity has not picked up in the first half and consumer spending is now slowing," StanChart India economists Samiran Chakraborty and Anubhuti Sahay in a report titled, 'Be patient on growth, despite reform rush'.

Noting industrial growth has stalled, they said "we now expect services sector growth, which has significantly lost momentum, to remain low for a while. Agriculture could also suffer from delayed monsoons."

The revision reflects sharper-than-anticipated slowdowns in main growth drivers, the economists said.

Though the first quarter growth at 5.5 per cent was marginally better-than-expected, "we cannot rule out the possibility of sub-5 per cent prints for the rest of the year.''

''A low-base should help boost annual growth readings in the second half of this fiscal, but we do not see this as a big driver," they said.

Warning of a sharper slowdown if more corrective steps are not taken at the earliest, they warned "lack of steps to fast-track investment approvals has pushed growth expectations even lower and the market is now prepared for another slowdown of the magnitude seen during the global financial crisis."

Hailing the flurry of reforms as 'steps in the right direction', the bank said "the momentum needs to be maintained as they will not have an immediate effect on growth."

Last week government effected a steep 12 per cent spike in diesel prices and capped subsidised cooking gas apart from allowing FDI in multi-brand retail, aviation, broad- casting and power exchanges.

While the macro backdrop remains challenging, a series of recently announced reforms to contain the fiscal deficit and increase foreign participation in selected sectors has led to renewed optimism, the report said.

"While these measures will have a positive medium-term impact and change the perception of policy paralysis, they may not have an immediate effect on growth. It will be important to maintain the reform momentum to put growth back onto an upward trajectory," the report said adding the asset markets are likely to respond to these steps positively.

On the industrial slowdown, it said growth has turned anaemic industrial, excluding construction. Construction activity, which has been at the highest level in the past 17 quarters, is the key reason for the better-than-expected Q1 numbers, the report said, adding delayed monsoons probably helped the sector, bucking the seasonal trend.

The report does not see the overall GDP prints getting any support from the industrial sector which grew an average rate of just 0.8 per cent in the past three quarters, saying lack of steps to expedite the approval process for investment projects has dimmed hopes of an imminent revival in activity, although a technical rebound from a low base is likely.

"We expect industry to grow 4.1 per cent in FY13, driven primarily by the construction sector. The lack of support from the Government or RBI (it expects first rate cut only in Q1, 2013) is also likely to keep other segments such as mining and manufacturing on a weaker footing."

On the services sector, which contributes about 60 per cent to GDP, it said though previously it has been consistently supporting growth, it has buckled under the pressure of weaker industrial activity.

From 10.2 per cent in Q1 of last fiscal, the services sector slowed progressively to 8.9 per cent in Q3 of FY12, 7.9 per cent in Q4 of -FY12 and 6.9 per cent in Q1 of this fiscal.

The latest slowdown has been driven primarily by domestic trade (retail and wholesale), which slumped to 4 per cent from 7 per cent in Q4 of last fiscal and 10 per cent in Q3 of last FY12.

"Therefore, we expect the services sector to remain in a slump for most of FY13 and may remain at 6.9 per cent," the report added.