OECD cuts India 2012 growth forecast to 7.1%; warns of risks from Euro Zone crisis

NEW DELHI: The OECD has cut India's growth forecast for 2012 by more than a percentage point to 7.1%, from its November estimate of 8.2%, but said it could recover to 7.7% in the calendar year 2013.

The biannual economic outlook report from the Paris-based think tank Organisation for Economic Cooperation and Development (OECD) has also warned of risks to the global recovery if Euro Zone crisis was not contained.

The forecast comes a day after Morgan Stanley's assessment that said India's growth could drop to 6.3% in 2012 and rise only to 6.8% in the year after.

Despite cut in growth forecast, India is expected to do better than most countries.

India's growth slowed to 6.1% during the third quarter ended December, the weakest pace in almost 3 years. The data for the January-March quarter will be released at the end of May.

The OECD said that a cyclical upturn in investment, stronger external demand and a loose monetary policy will boost growth in the short-term.

"A moderate cyclical pick-up in investment is projected in the near-term," the think tank said.

"Later this year and into the next, growth is set to pick up to around trend rates, supported by the delayed effects of the recent monetary policy easing."

It cautioned that there was limited room for more accommodative monetary stance due to inflation pressures and limited spare capacity and added that India will have to prioritise fiscal consolidation efforts to sustain the growth momentum.

"With the government deficit projected to remain close to 8% of GDP, consolidation appears necessary to reduce inflation, ease current account pressures and promote more balanced growth," the report added.

The report also said that policy uncertainty coupled with fiscal slippage "would weaken investment sentiment and result in softer near-term growth and an erosion of long-run prospects."

Last month, rating agency Standard and Poor's cut its outlook for India's credit rating to negative from stable, blaming high deficit and stalled reforms.

Over the long-term growth, OECD was more optimistic and said India could overtake China by 2020.

On a global level, Euro Zone uncertainties are expected to continue and weigh down the growth prospects of other developed economies. The report underscored the persistent nature of the Euro crisis and said that recovery in healthier countries will not be strong enough to offset flat or negative growth elsewhere.

"Even after five years (since the US subprime market crisis), we cannot say the crisis is behind us. More than once signs of recovery has disappointed," OECD Chief Economist Pier Carlo Padoan stated in the preface to the report.