Sixth Pay Commission: Goldman cuts GDP forecast for FY09 to 7.5%
14 Oct, 2008, 0235 hrs IST, ET Bureau
MUMBAI: Markets are now warming up to the fact that the global financial turmoil could indeed derail India’s growth. On Monday, Goldman Sachs scaled down its growth forecast for FY09 to 7.5% against its earlier forecast of 7.8% for the year, while growth forecast for FY10 is scaled down to 7% from 7.2% earlier.
The investment bank has said, ”The global financial crisis and the reduction in growth estimates by our economists for most countries should have an impact on India’s growth rates. Therefore, we are reducing our estimates of external demand growth and investment growth by a notch.”
Though the financing crunch was anyway expected, if the turmoil in financial markets and the very tight liquidity in domestic markets continue through the next few months, the growth outlook is expected to deteriorate further.
Though there are some signs of a slowdown, the economy may not have a hard-landing, it feels.
The monsoons have been normal, which is critical for the agricultural crop and in supporting rural incomes and consumption demand. Falling commodity prices, especially oil, should help improve the economy’s terms of trade, as India is a large net importer of commodities.
The slowdown in investment and external demand are also cushioned somewhat by ongoing projects in infrastructure and a weaker rupee, respectively. The government has provided a substantial fiscal stimulus by implementing the Sixth Pay Commission recommendations, which are expected to sizably increase the purchasing power of government employees. Although loose fiscal policy may compromise macro-economic health, in the short term, it will boost demand.
Hence, the Reserve Bank of India is expected to opt for a more accommodative stance. Besides Goldman Sachs, Barclays Capital too hold a similar view. The deteriorating global financial conditions, evidence of weakening activity, tight domestic liquidity and rapidly falling commodity prices suggest that the focus of monetary policy should and will shift to ensuring financial stability and growth over inflation, according to Goldman.
Source: http://economictimes.indiatimes.com
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