India swamped by a wave of growth downgrades
India has been hit by a wave of growth downgrades, with many analysts predicting the slowdown to worsen in the coming months, after gross domestic product (GDP) figures on Friday showed second quarter expansion falling to lowest rate in four years.
Industry watchers CNBC spoke to are now predicting full year growth ending March 2014 to fall short of their earlier targets of between 5.0 percent and 5.5 percent, with one bank calling for growth to slow to 3.7 percent. This is a marked deceleration from the 9 plus percent growth rates seen in 2010.
"This (April-June) is not the bottom. High-frequency indicators, such as HSBC's PMI (purchasing managers index) indices and business sentiment indicators suggest that the growth momentum eased further during the July-September quarter in both the manufacturing and services sectors," Leif Eskesen, chief economist, India and ASEAN at HSBC wrote in a note on Monday after the bank cut its growth forecast to 4 percent from 5.5 percent.
(Read more: India's woes deepen as GDP misses expectations)
India's GDP growth slowed to 4.4 percent in the April-June quarter from the year before, underperforming market expectations of 4.6-4.7 percent, driven by a contraction in the country's mining and manufacturing sectors. Investment and private consumption – which grew at its slowest pace since 1999 – were also notable weak spots.
"Reform announcements have yet to translate into action on the ground. Moreover, the Reserve Bank of India's currency stabilization measures have raised funding costs. Finally, heightened macroeconomic uncertainty is making consumers and businesses more cautious about spending," said HSBC's Eskesen.
Among the most bearish forecasters is BNP Paribas, which expects full year growth to slow to 3.7 percent, from an earlier 5.2 percent target, citing tightening financial conditions, a collapse in business confidence under the rupee's rapid depreciation and rising energy costs.
Robert Prior-Wandesforde, the head of India and Southeast Asia economics at Credit Suisse, said the country's recent economic performance is beginning to reflect a loss of the "country's normally strong animal spirits".
"The more we think about the current situation the more this seems to be a reasonable explanation. In our view, traditional economic logic cannot fully explain why the Indian economy is quite as weak as it is right now," he noted.
Prior-Wandesforde, however, said the bank isn't ready to "throw in the towel" and lower its annual growth forecast, which currently stands at 6 percent.
Some factors that may support growth include a bounce in exports, helped by a weak rupee and recovery in global demand, alongside increased agricultural output brought on by the favorable monsoon rains, he said.
In addition, he argues that as long as the Reserve Bank of India's recent moves to tighten liquidity – in order to make it more expensive for investors to short the rupee – is not a precursor to meaningful hikes in the benchmark interest rate, damage from tighter liquidity conditions could be limited.
"While it goes without saying that the risks to our 2013/14 GDP growth forecast of 6 percent are on the downside we are not ready to capitulate. The consensus could yet be surprised on the upside," he said.
(Read more: Rupee slump puts spotlight on India Inc's debt pile)
Prior Wandesforde said that if he is wrong, and growth continues to deteriorate, India could suffer considerable financial stress, making the use of the word "crisis" more applicable than it is now.
"In particular, widespread bankruptcies and associated non-performing loans in the banking sector could rise to levels that wipe out capital, forcing the government to inject significant funds into the banking system which push the budget deficit sharply higher again. Currency weakness, rising bond yields and a falling equity market would almost certainly continue unabated in such a scenario," he said.
—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H