PMEAC lowers forecast, still sounds optimistic

Written by fe Bureau | New Delhi | Updated: Sep 14 2013, 10:32am hrs
Seeking to sound a bit more realistic than it has in the past, the Prime Ministers Economic Advisory Council on Friday sharply reduced its GDP growth forecast for FY14 from 6.4% predicted in April to 5.3%. This is in sync with the Reserve Bank of Indias latest estimate of 5.5%, the 5-5.5% outlined in a recent article by Raghuram Rajan before he became the central bank governor. However, the councils estimate is still considerably higher than that of private forecasters like JPMorgan (4.1%), Standard Chartered (4.7%), CLSA (4.2%) and Nomura (4.2%). The reduced growth rate projected for this fiscal is still a shade higher than 5% achieved in 2012-13.

The council, slightly at variance with the finance ministrys assertion that the red line of budgeted fiscal deficit wont be breached, noted that the deficit in the first four months had amounted to 63% of the full-year target, which was now a challenge to meet. The council, headed by C Rangarajan, asked the government to compress discretionary spending and restructure subsidies in a growth-friendly manner to limit fiscal slippages.

Hoping that stability was returning to the foreign exchange market, Rangarajan said the rupee at the current level (it closed 63.48 against the dollar ion Friday) was well-corrected (finance minister P Chidambaram had said the Indian currency had overshot its value when it was ruling at 67-68 against the dollar). The council also predicted a drawdown of $9 billion from the countrys forex reserves owing to the huge portfolio outflows, not in conformity with Chidambarams claim that there would, like last year, be a small accretion to the reserves after fully funding the current account deficit.

Taking heart from the clearances being given to a number of big projects by the Cabinet Committee on Investment, the council said there was lead time before these resulted in economic activity or increased output and refrained from stating explicitly that these approvals would result in a pick-up in growth as early as in the second half of this fiscal. These projects, the council noted though, would set the ground for a strong revival in the next fiscal year.

Independent analysts, however, remained cautious, highlighting fall in private consumption growth to a decades low of 1.6% in the first quarter and the somewhat facile nature of the manufacturing rebound seen in the July Index of Industrial Production, driven as it was mostly by electrical equipment sector, which has a high seasonal element.

Indeed, the PMEAC seemed to confirm the view that investor sentiments are yet to revive as it projected the FY14 investment rate (IR) to be 34.5% of the GDP compared with 35% last year. This bore out the assumption that the precipitous decline of IR since 2007-08 when it peaked at 38.1% hasnt been arrested.

The PMEAC, echoing the view expressed by Prime Minister Manmohan Singh in Parliament recently, said that the RBIs current monetary policy stance had to continue until the rupees stability was achieved. It added that once the currency was stabilised and if the current trend in moderation of WPI inflation continued thereafter, the monetary authority could switch to a policy of easing.

Noting that the early and strong monsoon had had a hugely positive impact of sowing activity, the PMEAC pegged farm sector growth in FY14 at an ambitious 4.8% against 1.9% in FY13.

Crisil said in a recent note: While a normal monsoon and consequent pick-up in rural incomes could push up consumption growth and thereby aid a recovery in domestic-demand driven manufacturing industries going forward, a sustained revival of the manufacturing sector will be contingent on a pick-up in corporate investments.

Observing that the combination of lower growth in emerging market countries and widening CAD in some of these economies had until recently appeared troubling, the council said that as far as India was concerned, the problems on the currency front had queered the pitch in the summer of 2013 even as a focus on growth renewal was needed and the conditions were otherwise generally conducive for growth-friendly measures.

Turning to the other main challenge of reducing the deficit, Rangarajan said there will be a drawdown on foreign exchange reserves to finance the CAD. However, he was optimistic about the CAD narrowing to even less than the targeted $70 billion this fiscal or 3.8% of GDP, from $88.2 billion or 4.8% last fiscal. The PMEAC projected net capital flows to slip to be $61.4 billion in FY14 versus an estimated $89.4 billion in FY13, adding that there could be a drawdown of $9 billion from forex reserves this year compared with a net accretion of $3.2 billion during the last fiscal. The councils prognostication is not fully in line with the finance ministrys. Chidambaram had earlier said this years net capital receipts, aided by recent measures aimed at inflows of $11 billion, would be around $75 billion, as against an estimated CAD of $70 billion, allowing some accretion to the reserves. Rangarajan said if the recent trend of a fall in trade deficit (due to an increase in exports and a reduction in imports) continues, it will then lead to a reduction in CAD, but analysts warned that a good part of the reduction in import growth was due to the steep fall in gold imports, which could see a reversal in the quarters ahead.

On inflation dynamics, the PMEAC said the good performance in agriculture during F14 would have a moderating effect on food inflation. It said wholesale inflation by end March 2014 would be around 5.5% against the average of 7.4% in 2012-13 and 5.7% at end March 2013.

Mathew Joseph from Delhi-based Fore School of Management said tackling high retail inflation will hold the key to any further improvement in the GDP growth."The governments intervention in the food market is very high. Though we had a bumper crop, the government procured it at a very high price, leading to food inflation, which then led to high overall inflation and in turn a tight monetary policy leading to lower investment and lower growth. Therefore, food market reforms is what is required now."

In its September review Economic Outlook 2013-14, the PMEAC reiterated a host of suggestions for boosting growth augmenting domestic coal production and reducing oil subsidies to make them more price elastic, to name two. It also called for the development of the corporate bond market and public-private partnerships in defence procurement, besides a focused strategy to improve export competitiveness to take advantage of the rupees depreciation and an early resolution of transfer pricing issues.

On structural factors that would impact the economy, the PMEAC pointed to a decline in domestic savings rate decline of 6% between 2007-08 and 2011-12 almost entirely on account of a decline of 3.7% in public sector savings and 2.2% in private corporate savings. It has projected a marginal increase in domestic savings rate at 31% of GDP in this fiscal as against the estimated 30.2 % of GDP 2012-13.