INDIA: Drought may Slow GDP Growth to Below 5%: Citi

Things could be gloomier if Standard & Poor's downgrades India to junk grade

P Chidambaram has been welcomed to the finance ministry with a raft of downgrades for India's growth prospects, the latest being Citigroup, a global bank, predicting growth could slip below 5% if the drought were to worsen. 

The flurry of promises from the new finance minister may have buoyed the stock markets, but have clearly failed to impress brokerages, rating agencies and banks that see the Indian economy growing below 6% in the current financial year, even lower than the 6.5% in 2011-12, which was a nine-year low. 
CLSA, a brokerage, has also cut its forecast for 2012-13 to 5.5% from the 6% forecast earlier, as a deficient monsoon piles on more misery on the Indian economy buffeted by high inflation, tight monetary policy, rising fiscal deficit and weakening currency. 
"The stars just don't seem to be aligning for India, with almost all the growth drivers being hit," Citi economist Rohini Malkani wrote in a note on Tuesday estimating only a 5.4% expansion in the current year that faces downside risks. 
"Key to note is that, if drought conditions worsen, headline growth could come in lower at 4.9%," she adds. Monsoon was 17% deficient on August 6 and 32% below normal in the north-west India that includes some of the key agricultural states. Poor monsoon will lower farm sector growth and accelerate inflation, making it much more difficult for the Reserve Bank of India to begin monetary easing. 
Other big global banks such as Morgan Stanley and Bank of America Merrill Lynch have already projected sub-6% growth for Asia's third fastest growingeconomy. "Unfolding events should support our call that a drought - at high lending rates - will water down FY13 growth to 5.8%," Bank of America Merrill Lynch said in a note on Monday. On Tuesday Crisil, the Indian arm of rating agency Standard & Poor's, pared its forecast by a steep percentage point to 5.5%. 
Things could get nastier if Standard & Poor's carries out its threat and decides to downgrade India to junk grade, which could impact capital flows, push up costs of borrowed funds, and depreciate further the already weakened currency. 
The government's forecasts are also increasingly downbeat. Deputy chairman of Planning Commission Montek Singh Ahluwalia on Monday said the economy will expand about 6% in the current year, down from the 7.6% estimated at the beginning of the year. 
Finance minister P Chidambaram on Monday outlined a plan to improve sentiment, but faces significant hurdles, notability the seeming inability to push through game changing reforms such as allowing FDI in multi-brand retail and reducing subsidies in diesel. 
"It is true that the economy is challenged by a number of factors, but it is also true that with sound policies, good governance and effective implementation, we would be able to overcome these challenges," the minister said, promising measures to improve investor sentiment and a firm plan to tackle fiscal deficit. 
Though Chidambaram enjoys greater credibility with markets and investors compared to his predecessor, Pranab Mukherjee, now President of India, even he may not have enough time to turn around the economy before electoral politics takes over. 
"We reiterate our view that while a change in guard in the finance ministry is positive, actions may be less than words given the continuation of the dual leadership model and all eyes on the next polls," Malkani wrote. Dual leadership is a reference to the fact that while Manmohan Singh presides over the government, real power vests with Congress president Sonia Gandhi. 
Chidambaram's biggest test will be to meet the government's fiscal deficit estimates for the current fiscal, pegged at 5.1% of GDP. Through much of last financial year, the government stuck to its deficit target of 4.7% of GDP even as experts mocked at the numbers. The eventual outcome was a fiscal deficit of 5.9% of GDP.