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'Recession may pull down India's GDP to 3 per cent'

Continued bearish phase in the global economy may pull down India's economic growth rate to a dismal 3 per cent in 2009, said the international financial services major Morgan Stanley.

business Updated: Mar 02, 2009 23:56 IST

Continuation of the bearish phase in the global economy could pull down India's economic growth rate to a dismal 3 per cent in 2009, said international financial services major Morgan Stanley.

Morgan Stanley's research report released on Monday said, depending upon the extent of economic recovery in the developed world, India's Gross Domestic Product (GDP) growth rate during 2009 could range between 3 per cent and 5 per cent.

"Based on bull-bear case outlook for G7 (club of developed countries), we see bull scenario growth for India at 5 per cent in 2009 and 7.4 per cent in 2010 and bear case at 3 per cent in 2009 and 4.5 per cent in 2010", it added.

However, on an average, the report projected India's economic growth rate for 2009 at 4.3 per cent and for 2010 at 6.1 per cent.

According to advance estimates of national income released by the government recently, the economic growth rate during 2008-09 is expected to moderate to 7.1 per cent from 9 per cent in the previous fiscal.

The third quarter growth (October-December 2008) rate has been estimated at 5.3 per cent, down from 8.9 per cent posted during the corresponding period last year.

On the outlook for equity markets, Morgan Stanley said the outcome in 2009 would depend upon two key factors - election results and global developments.

"If the global economy turns around, India will likely start faring better. However, elections in May will still hold the key to a sustainable recovery," the report said.

Making a case for a strong government following general elections in April, the report said, "a sustained turnaround in growth will need a fiscal response, which in turn depends on a strong government".

On the other hand, it added, "a weak government could make a recovery tepid and long. It could also lead to a paralysis in the reforms process and damage medium term growth."

The report added that non-performing loans are already rising in various business segments like real estate, personal loans and exports.

With industrial production having reached a 16-year low of -2 per cent in December 2008 and cost of capital is still high, it said, "the non-performing loans will rise further" and will make banks risk averse to lend to the corporate sector, resulting in a vicious slowdown".