Investment bank Goldman Sachs downgraded its forecasts for India’s economy on Tuesday in the wake of Rs 13,000 crore fraud at Punjab National Bank, warning that it could spark tighter regulation of the banking sector, which in turn would constrain credit growth, Reuters reported. Goldman Sachs said that it has lowered India’s GDP growth forecast for the fiscal year 2018-19 to 7.6% from 8% earlier.
Interestingly, Goldman Sachs’ revised forecast of 7.6% GDP growth is higher than estimates made by the World Bank and rating agency Fitch. Fitch, which does analysis on financial year (April- March) basis estimated India’s GDP growth for FY19 to be 7.3%, while World Bank, which does analysis on current year (January-December) basis, estimated India growth in the year 2018 to be 7.3%.
Similarly, for the year 2019 and fiscal year 2019-2020, World Bank and Fitch have estimated a GDP growth of 7.5%, while retained its 2019-2020 growth forecast at 8.3%. The Rs 13,000 bank fraud detected last month by India’s second-largest state-run lender has sent bank shares tumbling, which Goldman Sachs said that it feared a regulatory crackdown after the fraud and could increase Indian banks’ provisioning burden and so slow credit growth.
“Markets and investors are questioning whether the problem is more systemic,” Goldman analysts said as quoted by Reuters. India’s GDP growth in the first half of the fiscal year 2017-18 was bogged down by the twin-effect of demonetisation and the implementation of the Goods and Services Tax (GST).
However, disruptions caused by structural changes started fading out and the economic growth began looking up in the second half of the fiscal year 2017-18. Despite the economic growth revival, two major concerns remain: First, the higher fiscal deficit for both current fiscal year and next fiscal year; and second, high NPAs in the banking system.
India’s total NPAs in the banking system has topped Rs 8 lakh crore, as per government’s data. Along with that, a flurry of bank frauds has sparked concerns that India credit growth despite a massive Rs 2.11 lakh crore recapitalisation plan is unlikely to pick up.