The pace of growth of real GDP at factor cost is expected to print at a lower 5% in Q2FY15 as compared to 5.7% in Q1FY15...
The pace of growth of real GDP at factor cost is expected to print at a lower 5% in Q2FY15 as compared to 5.7% in Q1FY15, on account of factors such as an unfavourable kharif harvest, sluggish manufacturing performance, slowdown in export growth and moderation in the pace of expansion of Central Government spending.
This was revealed by ICRA Research, in a note issued here today.
In terms of the sectoral components, GDP growth would be dampened by a slowdown in agriculture (0.5% in Q2FY15; 3.8% in Q1FY15) and industry (2.6% in Q2FY15; 4.2% in Q1FY15), offset to a small extent by a slight uptick in the services sector (6.9% in Q2FY15; 6.8% in Q1FY15).
Here are the highlights:
ICRA maintains its forecast of GDP growth of 5.3-5.5% in 2014-15: With business sentiment improving, new project announcements picked up in Q2FY15. Moreover, the Cabinet Committee on Infrastructure (CCI) has facilitated clearances for 181 existing projects entailing a cost of Rs. 6.4 trillion. However, the high concentration of power sector projects in the total cost of new projects and clearances facilitated by the CCI suggests that the pace of implementation may remain slow in light of continuing issues related to coal linkages and financial health of State Discoms.
Agricultural growth in 2014-15 is expected to remain below 1.5%, which in conjunction with modest rise in MSP is expected to keep rural consumer sentiment in check. Despite the moderation in headline inflation, a broad-based revival in consumption demand is yet to set in. With interest rates remaining largely sticky, ICRA expects the manufacturing sector to record a mild growth in FY15. Given that various adverse developments over the last quarter (unfavourable kharif harvest and knock on impact on consumption, weakening growth of exports, fall in automobile production post waning of base effect) are largely in line with ICRA’s expectations, ICRA maintains its forecast of GDP growth of 5.3-5.5% in 2014-15.
Sharp slippage in GoI’s fiscal performance unlikely: With tax revenue growth substantially underperforming the budgeted target in H1FY15, ICRA remains concerned regarding the likelihood of either the direct or indirect tax targets being met in FY15, notwithstanding the increase in excise levied on petrol and diesel from mid-November 2014 as well as the possibility that the outgo for tax refunds may be relatively muted in H2FY15 and economic growth may revive in Q4FY15. In this context, revenue buoyancy will crucially hinge upon the success of the telecom auction and disinvestment offerings in the remainder of this fiscal. The recently announced fiscal prudence measures and savings related to the budgetary allocation for food subsidy (following the extension in the deadline for State Governments to identify eligible households under the National Food Security Act to April 1, 2015) and fuel subsidies (related to the expected moderation in under-recoveries with the fall in crude oil prices and deregulation of diesel prices) would ease the pressure on non plan revenue expenditure in H2FY15. Nevertheless, some further expenditure pruning may be needed to prevent a slippage relative to the fiscal deficit target of 4.1% of GSDP in the BE for 2014-15. While the magnitude of such cuts is unlikely to be alarming, the nature of the same would impact the quality of fiscal consolidation in 2014-15. Based on the expectation that a sharp slippage relative to the fiscal deficit target for 2014-15 is unlikely, ICRA does not anticipate an enhancement of GoI’s dated borrowing programme for the current fiscal.
Repo rate cuts unlikely in FY15:ICRA expects the RBI to refrain from premature monetary easing in a bid to support growth, despite the lag associated with policy transmission. With continuing excess capacities in a number of sectors, a cut in interest rates is unlikely to spur a revival in the capex cycle in the near term. Moreover, a fall in interest rates is unlikely to revive projects that are stuck on account of issues related to land acquisition, availability of feedstock, clearances etc. A concerted effort by the Central and State Governments to remove such impediments is likely to produce a more durable revival in growth than an early rate cut by the RBI.
Lower value of commodity imports to offset recent surge in gold imports and weaker export outlook: A rise in gold and non-oil non-gold imports and subdued growth of exports are expected to have widened the merchandise trade deficit to a five quarter high USD 38.8 billion in Q2FY15 from USD 33.3 billion in Q2FY14 (on a Balance of Payments or BoP basis). Despite an improvement in the services trade surplus to USD 18.7 billion in Q2FY15 from USD 17.8 billion in Q2FY14, the current account deficit is likely to print at a larger USD 10.0-11.0 billion in Q2FY15 as compared to USD 5.2 billion in Q2FY14 (and USD 7.8 billion in Q1FY15).
Notwithstanding improved growth in the US, a bleak growth outlook for the Euro Zone and Japan and a y-o-y strengthening of the INR against a broad range of currencies (other than the USD), suggest a muted real growth of Indian exports in the remainder of this fiscal, dulling a key engine of India’s growth for the previous four quarters. Nevertheless, the average monthly trade deficit is expected to narrow from USD 13.8 billion in September-October 2014 to USD 10-12 billion per month in the remainder of FY15, reflecting the easing of commodity prices and a normalisation of gold imports post the festive season. Assuming that gold imports in FY15 will not be allowed to exceed the level in FY14, ICRA expects a current account deficit of ~USD 35-37 billion or ~1.7-1.8% of GDP in 2014-15, which would be comfortably financed by capital inflows.