Emerging economies in Asia such as China and Korea are poised for solid growth in 2014, but India is likely to miss the bus, according to a report by Goldman Sachs.
India is likely to grow at 4.3 per cent in fiscal year 2013-14 and at below consensus 5.5 per cent in fiscal year 2014-15, Goldman Sachs estimated.
The forecast would give little comfort to policy makers, who expect the economy to turn for the better in the second half of the current fiscal. Finance Minister P Chidambaram recently said India might end fiscal 2013-14 with 5.5 per cent growth.
The rise in long term interest rates across developed markets led to funding pressures and contributed to a severe slowdown in growth, Goldman noted.
Interest rates in the US have been rising in anticipation of an impending tapering of stimulus. Rising yields in the US led to fears of exodus of funds from India. As a result, the rupee fell to a record low in August as fears about financing of a record current account deficit grew.
"The Reserve Bank raised effective policy rate, utilized reserves and encouraged capital inflows, but nonetheless acquiesced to some currency depreciation. The near-term impact has been deceleration in growth...," Goldman said.
India has also been hurt because of policy uncertainty ahead of elections in 2014, the investment bank said.
"Upcoming parliamentary elections in early 2014 are a major area of uncertainty, with potentially large impact on policy reforms and investor/corporate sentiment in either a positive or negative direction," Goldman said.
The new RBI Governor Raghuram Rajan is trying to "balance growth and inflation concerns," the investment bank said adding the central bank may hike the repo rate to 8.5 per cent by the end of June 2014.
That would mean a 75 basis point hike from current levels of 7.75 per cent and may further hamper India's investment cycle.
Wholesale price inflation hit an 8-month high in October, while retail inflation has hit the double digit mark. Goldman expects headline inflation to ease to 6 per cent range and CPI (retail) inflation to 8.3 per cent by 2014-15.
A greater than expected policy rate hike to tackle persistent inflation will lead to further downsides to growth, the bank noted.
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