News Business GDP growth may slip below 1-2% if CAD halves: Jefferies

GDP growth may slip below 1-2% if CAD halves: Jefferies

New Delhi: A fall in the current account deficit to $30-$50 billion, or about half of current levels, has the potential to reduce India's GDP growth rate to 1-2 per cent, Jefferies wrote in a

gdp growth may slip below 1 2 if cad halves jefferies gdp growth may slip below 1 2 if cad halves jefferies
New Delhi: A fall in the current account deficit to $30-$50 billion, or about half of current levels, has the potential to reduce India's GDP growth rate to 1-2 per cent, Jefferies wrote in a note.



Jefferies argued that the CAD compression can have a similar negative economic impact such as monetary or fiscal tightening, by the impact that falling imports, which it estimates account for nearly 16 per cent of India's economy, can have on domestic demand and employment.

"We maintain that India's GDP growth is headed for a far steeper decline than the already muted expectations, as the impact of the currency/CAD-related damage has barely started," analysts at the investment bank wrote.

Jefferies says that last week's June-quarter growth data was worrying as only two sub-components seen growing above the headline mark of 4.4 per cent, with growth coming from services and government spending.

Several foreign brokerages including CLSA, Nomura, JP Morgan, and HSBC have cut growth estimates for India by up to 2% due to tightening financial conditions, slowing industrial production and increasing economic uncertainty.

Most of the brokerages now expect the country's gross domestic product Indian economy to grow at 3.7% to 4.2% in the financial year 2013-14, a slash from earlier forecasts between 5% and 5.5%, after the country's GDP grew at a four-year low of 4.4% in the first quarter, down from 4.8% in the January-March quarter.

This is the third time several top brokerages are downgrading their GDP estimates this year.

Analysts feel GDP growth in second quarter slowed more than expected and things are likely to get worse in the third quarter when government spending, which maintained a blistering pace, will probably slow down as concerns about fiscal slippage increase. They say the benefits of good monsoon are likely to be more than offset by the sharp depreciation of the rupee.

For the financial year ended March 2013, India grew 5%, the lowest in 10 years as India Inc postponed much their expansion plans citing high interest cost and weak demand. The rupee—the worst performer among Asian currencies—has declined more than 17% against the US dollar so far. During the credit policy in July, the RBI had announced a series of measures to stabilise rupee.

This pushed short-term interest rates by about 3 percentage points. Many brokerages cut their GDP growth forecast immediately after RBI announced the monetary-tightening measures.

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