Citi revises 2011-12 GDP forecast downward to 7.1%

International financial conglomerate Citigroup has revised its 2011-12 growth forecast for the Indian economy downward to 7.1 per cent from the earlier estimate of 7.6 per cent on account of the global slowdown and domestic factors like a tight monetary policy.

“We are reducing our FY’12 GDP estimate from 7.6 per cent to 7.1 per cent,” Citi Investment Research & Analysis said in its ‘India Microscope’ report.

The global major has also revised its forecast for India’s Gross Domestic Product (GDP) growth in 2012-13 downward to 7 per cent from the earlier estimate of 7.5 per cent.

Citi’s growth projection for the current fiscal is way below the 7.6 per cent forecast made by the Reserve Bank.

It is also lower than the projections made by the Organisation for Economic Cooperation and Development (OECD), Centre for Monitoring of India Economy (CMIE), Crisil and ICRA, who have all pegged India’s GDP growth in 2011-12 at between 7.3 per cent and 7.6 per cent.

The Indian economy expanded by 8.5 per cent in 2010-11.

Citi said the hangover from the pre-recession credit boom will cast a shadow in 2012 as well.

“In addition, domestic issues, including supply-side bottlenecks in the coal and power sector and the lagged impact of monetary tightening, are taking a toll on domestic growth,” it said.

It said the current situation is reminiscent of 2008-09, when the Indian economy faced a plethora of problems, including the global crisis, delayed investments due to uncertainty on the election front and aggressive policy tightening resulting in a slowdown.

“Unfortunately, India has less manoeuvrability relative to the 2008 pullback given its increased fiscal constraints, elevated levels of inflation and government decision-making. This will likely result in to weak growth...,” Citi said.

While issues like environmental clearances and land acquisition have affected infrastructure sectors like power and coal, the high interest rate regime has been blamed for making credit expensive and leading to a halt in fresh investment.

The RBI has hiked lending rates 13 times by 350 basis points since March 2010, to curb inflation. In addition, the world economy has been affected by the debt crisis in the euro zone and a slowdown and high unemployment in the US.

Regarding inflation, Citi said: “We expect inflation to remain over 9 per cent till the end of 2011 and average 7.5-8 per cent in 2012.”

Headline inflation has been above the 9 per cent-mark since December last year and stood at 9.73 per cent in October this year.

“In its latest policy, RBI stated that the likelihood of (further) rate action is relatively low. However, the key issue now is its inflation tolerance level, as inflation is way above its medium-term target of 4 per cent,” Citi said.

“Given the sharp deceleration in growth, the possibility of lower commodity prices and a worsening in global macro conditions, we expect the RBI to begin its easing cycle by the second half of 2012,” it added.

It said that a higher payout on account of oil subsidies will push up the fiscal deficit to 5.1-5.8 per cent in 2011-12 against 4.7 per cent in 2010-11.

“We expect the deficit to widen between 5.1-5.8 per cent of GDP in FY’12, depending on the extent of the payout of oil subsidies,” Citi said.

“This is higher than the budgeted targets of 4.6 per cent of GDP and thus this could result in additional funding requirements to the tune of Rs 50,000 crore over-and-above the recently announced extra Rs 53,000 borrowing programme,” it said.

The conglomerate said to incentivise fresh investment, the government needs to undertake a number of steps, including rationalisation of power costs, expedited clearances for mining projects and resolution of issues related to compensation and rehabilitation of people whose land is acquired.

To tackle the problem of inflation, it suggested improving the logistics chain to reduce wastage, raising productivity by emphasising seed, irrigation and fertiliser-related reforms and unifying markets.

It also called for structural steps such as early implementation of Goods and Services Tax (GST) and the Direct Taxes Code (DTC).

Citi also said steps should be taken to address concerns over unreliability of government data.

“Another important aspect to rooting out corruption would involve electoral reform... Low limits on election spending have resulted in lack of transparency, widespread corruption and the pervasiveness of black money,” it said.