Testing times: Indian economy to further slowdown to only 7.2% in 2012

What could be India’s way out of the slowdown?

According to Morgan Stanley, the revival in private investment growth is the key.

Here’s more from Morgan Stanley:

Slowdown in domestic demand to hurt F2012 growth: Growth in India had remained relatively strong until the quarter ending March 2011 - but clear signs of slowdown have emerged over the last 3-4 months. Auto sales, modern format retail sales, investment and construction spending appear to be moderating.

We believe a combination of factors - including persistently high inflation, higher cost of capital, cut in the ratio of fiscal spending to GDP, a weak global capital markets environment, and slow pace of investment - will cause a further slowdown in growth. Considering these developments we had recently cut our growth estimates for F2012 to 7.2% from 7.7% earlier.

US and Europe dangerously close to recession: The developments in US and Europe have made the global economics team more concerned about the growth outlook in the developed world. Our team has cut developed world (G10) growth to 1.5% for both 2011 and 2012 (down from 1.9% and 2.4% previously).

Cutting F2013 growth estimates further: We believe that weaker G10 growth next year will impair India's F2013 growth outlook. We are now cutting F2013 growth to 7.6% from 8.0% estimated earlier. On a calendar-year basis we are cutting 2012 growth to 7.4% from 7.8% estimated earlier.

What is the way out of the slowdown? We believe that revival in private investment growth is the key. The government needs to adopt a two-pronged strategy. First, to appoint a powerful group of ministers led by the Prime Minister to fast-track 25-30 core projects, giving them full support on execution in order to kick-start an investment cycle. Second, to accelerate the pace of policy reforms, which have already been in the pipeline for some time.

Photo credit: Irshu

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