Economists raise growth forecasts after elections

Economists raise growth forecasts after elections
Business Standard, June 4, 2009, Page 1

John Samuel Raja D & Swapnil Mayekar / New Delhi/ Mumbai

Prospects of a stable government at the Centre have prompted at least six economic forecasters to raise their growth estimates for the current fiscal, citing lower-than-expected political risk after the recent general elections.

With the Congress-led United Progressive Alliance (UPA) coming to power with less than half the number of allies than it had before and the four Left parties out of the picture, the average economists’ forecast for GDP growth in 2009-10 has increased over half a percentage point to 6.35 per cent after the election results were announced. Before the elections, growth was projected at 5.61 per cent, according to data collected from eight economic forecasters. Two forecasts were not revised.

“The political risk has been mitigated with a stable government at the Centre,” said Subir Gokarn, chief economist with Standard & Poor’s (S&P), a rating agency. “A stable government will speed up certain investment decisions so people would be more positive about the future.”

Although S&P — which downgraded India’s sovereign rating outlook on account of the rising fiscal deficit in January 2009 — has not revised its growth estimate, others like Morgan Stanley, Nomura and Kotak Mahindra had all done so.

The prospect of higher political risk from a widely expected hung Parliament had prompted GDP projections for 2009-10 to be revised downwards.

“The election results will have a positive impact,” said Saumitra Chaudhuri, an economist with rating agency ICRA Ltd and member of the Prime Minister’s Economic Advisory Council. He said the negative bias to growth will go out his earlier prediction of 7 per cent, with a range of half a percentage point.

These upward revisions are expected to have an impact on corporate investments, which were the main driver when the Indian economy grew at 9 per cent and above for three years till March 2008, contributing nearly 50 per cent of the expansion in output.

“Given that the UPA no longer needs outside support of the Left, it would now be able to continue with the reform process unhindered,” wrote Citigroup analysts in a recent research note.

The four Left parties had voted with the government in the Lok Sabha the last time and had been instrumental in blocking a significant amount of economic reform.

“While trends in consumption are likely to sustain, given that the government had already implemented fiscal stimulus measures over the past year, the UPA’s clear majority would now spur investment growth as well,” the Citigroup analysis added.

There is now a heavy weight of expectation that the government, free of Left, will push economic reforms in areas like banking, insurance and capital markets that will enable greater capital flow into the economy.