Wary about Narendra Modi govt, economists trim India GDP forecast to 5.3 pct

Written by Reuters | Bangalore | Updated: Jul 24 2014, 20:00pm hrs
Narendra ModiEconomists temper their optimism on whether the first majority government in 3 decades would quickly bring in reforms and spur business investment.
India's economic growth will accelerate this fiscal year but economists in a Reuters poll trimmed their forecasts, tempering their optimism the first majority government in three decades would quickly bring in reforms and spur business investment.

While the latest consensus still suggests growth will beat the rate of less than 5 percent seen in the past two years, it does not reflect the stock market euphoria since Prime Minister Narendra Modi's historic election win two months ago.

The new mood has helped push the Sensex index of leading shares up nearly 24 percent since the start of the year.

"A lot of it at the moment is sentiment," said Daniel Martin, Asia economist at Capital Economics. "The stock market rallied and the rupee is a bit more stable but until we see Modi doing something to justify the optimism, we are going to remain cautious."

Asia's second-largest economy grew 4.7 percent in the fiscal year to March 2014.

The poll of 25 economists taken this week forecast growth would rise to 5.3 percent in the current fiscal year, slightly down from the 5.5 percent expected in April, when the world's largest democracy was in the middle of national elections.

Growth is expected to be 6.3 percent next year, unchanged from the previous poll.

For some forecasters at least, it is too early to expect drastic policy changes that would lead to major upward revisions to growth forecasts.

But Finance Minister Arun Jaitley's first budget two weeks ago disappointed those who hoped radical reforms were on the cards.

Only five of 16 economists expected the government to meet its budget deficit target of 4.1 percent of GDP for the current fiscal year.

Jaitley has promised to boost annual economic growth to 7-8 percent in three to four years.

Consumer price inflation, which has been the biggest challenge for the Reserve Bank of India and the government, has cooled. It dropped to 7.3 percent in June, the lowest level since this series began in January 2012, from 8.3 percent in May.

But inflation is still forecast in the poll to average 7.7 and 7.5 percent over the current and following quarters, and 7.7 percent this fiscal year, before falling to 7.0 percent next year.

The Reserve Bank of India is expected to leave its main policy rate unchanged at 8 percent well into next year.

Factory output growth, which has averaged less than 1 percent in annual terms over the past 12 months, has been one of the biggest drags on growth. But it picked up to 4.7 percent in May compared to a year earlier.

A separate Reuters poll taken last month showed stock market strategists remained bullish, predicting the Sensex would keep setting record highs in the coming year.