DSP Merrill Lynch revises downward GDP Growth

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Mumbai, Nov 18 (UNI) With the Indian Economic growth gathering storm, fiscal year 2010 will bear the brunt of recessionary trends, pushing the real Gross Domestic Product growth to 5.8 per cent as against the orignally forecast of seven or six per cent, Indranil Sen Gupta, Economist with the DSP Merrill Lynch (India) said today.

In a report here, he said the growth forecast for the current fiscal would be 7.3 per cent as against 7.5 per cent originally estimated. The revision was mainly due to global growth forecast collapsing to 1.8 per cent from 3.1 per cent in mid september.

''We thus return to our natural home below consensus. In view of the global fiscal and monetary stimuli, we expect the turnaround to be 7.5 per cent in fiscal year 2011,'' he said.

He said DSP Merrill Lynch had recognised that the growth cycle was past peak as early as in July 2007. ''At the same time, we believed that the economy could soft land to 7.5-8 per cent growth.

India did indeed never 'overheat' as was then fashionably feared. We did hope, in vain, that the economy could weather a US recession if everyone else decoupled. Global recession has unfortunately progressed from a theoretical worst possible scenario to harsh reality.'' He said the contraction in exports will impact demand and Industry will bear the brunt of the slowdown because it is largely export oriented.

With the Indian economy dependent on international finance through external commercial borrowings (ECBs), FII investment in IPOs for project finance the extraordinary freeze in credit markets drying up capital flows cannot but squeeze investment plans, leading to a stunted growth. The Reserve bank of India (RBI) could not bail the economy out as it could not fund long tenor funding, but could create only bank money and the relatively short-term liability profile of bank deposit liabilities cannot fund long-tenor funding.

The report said ''in view of the external orientation of the shock, we would look first for normalisation of world trade. And, second, given the investment dependence on capital flows, normalisation of international credit markets allowing, at the least, revival of ECBs''.

It said, ''Our lower growth estimate essentially emanates from a cut in industrial production as it is substantially exposed to export demand. The slowdown in industry, in our opinion, will have knock-on effects on services, especially construction and trade, hotels, transport and communications. We have projected agricultural growth at trend and indeed the first indications of the 2008 winter rabi crop that harvests May 2009 are encouraging.'' UNI VK RN NP1614

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