"The recent monetary tightening and uncertain global capital market environment could mean growth stays low for at least two more quarters. A weak growth trend lasting for four-five quarters would increase the risk of a vicious cycle building, whereby the economy becomes vulnerable and the risk increases of GDP growth sliding to 3.5-4 per cent," a report by Morgan Stanley Asia Chief Economist Chetan Ahya has warned.It also notes GDP, which was below five per cent during periods ended December 2012 and March 2013, is unlikely to have increased during the first quarter of the current financial year. According to Ahya, if the growth slows further, it would result in sharp rise in non-performing assets of banks leading to risk aversion in the banking sector, increase in challenges relating to fiscal deficit management with weaker revenues and reduced confidence of foreign investors, exacerbating the external funding risks further.
Stressing on the need to overcome from this downward spiral, the report called for accelerated pace of policy reforms. "A sustainable solution would be to accelerate implementation of structural reforms that in turn help to correct the imbalances in the economy and put it back on a positive productivity dynamic. The pace at which these external developments have unfolded has only increased the urgency for an accelerated pace of policy reforms," notes Ahya.
Giving possible scenarios in case the rupee plunge continues, the report says the government is likely to augment capital inflows in some of dollar debt but warns that such steps may not make major difference unless the global environment improves.
"In our view, in the near-term, as US real rates and the US dollar keep rising, the country will have little choice to ensure higher real rates and sacrifice growth," the report concludes.