UN cuts India GDP forecast to 6.1% for 13, fears another recession

Written by fe Bureau | New Delhi | Updated: Jan 18 2013, 06:02am hrs
Warning that the global economy could slip into a new recession this year, the United Nations on Thursday pared India's growth forecast sharply to 6.1% for 2013 from 7.2% projected earlier due to a combined impact of high interest rates and a bulging fiscal deficit.

UN's World Economic Situation and Prospects report also points out that downside risks like the European debt crisis and a hard landing in China could impact India and restrict real GDP growth to 6.5% in the next calendar year.

Presenting a gloomy outlook for the global economy, UN said the growth could revive marginally to 2.4% during 2013 from 2.2% last year.

While the best-case scenario pegs the growth rate at 3.8% with policy reforms across the globe, the worst-case scenario is a near-recession like situation with a measly 0.2% expansion. A worsening of the euro-area crisis, the fiscal cliff in the US and a hard landing in China could cause a new global recession. Each of these risks could cause global output losses of between 1% and 3%," said Rob Vos, UN's team leader for the report.

India will not be an exception to the global slowdown even though much of its slowdown was due to persistent inflation, high nominal interest rates, large fiscal deficit and political gridlock, the UN report said.

These factors will likely continue to impact economic growth in the next two years even as moderate recovery is expected, it said, adding the scope for policy stimulus in India and other South Asian countries is limited. UN's chief economist for India, Nagesh Kumar, said the finance minister should announce some incentives in the Budget for reviving investment and growth, even while reducing the fiscal deficit gradually. I hope RBI will also support government's efforts for revival. Some monetary easing is needed as core inflation has come down as continuing a tight monetary policy will only delay the recovery," he said.

India's economic growth slid to a decade-low of 5.4% during April-September 2012, which prompted Prime Minister Manmohan Singh to indicate that growth could slide below 6% in fiscal year that ends in March 2013, from 6.5% during 2011-12 and 8.4% during 2010-11. UN's forecast corroborates with analysts in Citi, CLSA and HSBC which expect a mild recovery to 6-6.2% during 2013-14. However, Crisil expects GDP to grow 6.7%, assuming normal monsoon, higher government spending, recovery in exports and rate cuts from Reserve Bank of India.

In the South Asia region, India's economic expansion will be slower than even Bangladesh and Sri Lanka, which are expected to grow 6.3% and 6.7%, respectively during 2013 and by 6.4% each in 2014. Among BRICS nations, India will trail China, but grow faster than Brazil, Russia and South Africa.

UN lowered China's GDP growth forecast 0.6 percentage point to 7.9% for 2013 and forecast 8% for 2014. Brazil is expected to grow 4%, Russia 3.8% and South Africa 3.1%. The growth rates of BRICS nations will be much higher than the average for developed nations at 1.1% during 2013.