Morgan Stanley cuts India's GDP forecast to 7.1%

Written by Reuters | Mumbai, March 31: | Updated: Mar 31 2008, 18:43pm hrs
Morgan Stanley said on Monday it had cut its forecast for India's economic growth to 7.1 percent for the fiscal year starting in April, after the government said last week it was prepared to give up growth to fight inflation. This would be the slowest economic expansion in Asia's third-largest economy in six years, after a sizzling 9.6 percent rise in 2006/07 and a central bank estimate of 8.5 percent in 2007/08.

Annual inflation in India struck 6.68 percent in mid-March, the highest since a two-year peak of 6.69 percent in January last year, mainly due to a jump in world prices of food, oil and metals.

"This has increased the risk that policymakers will initiate fresh measures which will further compress the growth trend," Chetan Ahya and Tanvee Gupta, economists at the US investment bank, wrote in a note.

Morgan Stanley, which had earlier projected India's growth at 7.4 percent in 2008/09, said it had also lowered its forecast for 2009/10 to 7.6 percent from 7.8 percent.

The reductions follow cuts by other research houses, including JP Morgan and HSBC.

"Increased risk aversion in the global financial markets and delay in the much-needed policy rate cuts due to inflation's rise, will affect India's growth outlook," Morgan Stanley said.

"We believe that, in addition to weak consumption and export growth, now business investment will also start slowing over the next six months," it said. Export growth in rupee terms has slowed to an average 7.9 percent over the past six months from 23.3 percent in the 12 months ended March 2007, it said.

Industrial production grew 5.3 percent in January, sharply slower than an average of 8.3 percent in the December quarter and a peak of 15.8 percent in November 2006, it said.

"In our view, weaker sales growth when capital charge for new capacity is increasing will hurt corporate profitability and sentiment," it said.