Indian GDP growth to pick up in 2014, inflation to fall – D&B

Corporate and financial information provider Dun & Bradstreet said India’s GDP growth is likely to pick up pace in the new year, rising to 5.5% compared to its estimate of a 4.8% GDP growth in 2013. It also expects wholesale inflation to fall to around 5.8%.

“Owing to the substantial moderation in the services sector along with the weak industrial activity, D&B expects India’s GDP to grow by only 4.8% during CY2013, lower than the 5.1% growth recorded during CY2012,” it said. “While investment scenario continued to remain bleak, the significant moderation in the private demand conditions is likely to have severely dented the growth momentum during CY2013.”

However, D&B expects growth to recover, albeit moderately, during CY2014 on improved policy environment, projects cleared by the Cabinet Committee on Investment, expectations of receding inflationary pressures along with some revival in demand conditions. The growth momentum is expected to pick up during the second half of CY2014 as the impact of the policy measures taken and the project clearances unravel in due course of time, it said.

Disaggregating the growth data on a sectoral basis, D&B expects healthy agricultural output, modest upturn in the services sector and moderate growth in the industrial sector to support the overall growth during CY2014.

Given the deterioration in the private demand condition, significant fall in the investment activity due to the increase in the number of stalled/abandoned projects and fewer new investment proposals and continued deterioration in the mining sector output D&B expects the industrial component of the GDP to register a very low growth of 1.9% during CY2013, D&B said. Industrial activity is however, expected to witness some buoyancy and grow by 3.0% during CY2014 driven by revival in the investment activity and likely improvement in business sentiment. External demand is likely to remain much more conducive during CY2014 as compared to the previous two years.

D&B expects services sector to grow by around 7.2% during CY2014, slightly higher than the 6.5% growth expected during CY2013. Some expected recovery in the global economy and revival in industrial activity would push the growth in the overall services sector during CY2014.

Private final consumption expenditure (PFCE) is likely to have moderated significantly during CY2013. Weak industrial production translating into lower earnings of corporate, slowdown in income growth, elevated consumer price inflation and inflation induced erosion in purchasing power have led to lower consumption demand by the private sector. PFCE is expected to revive during CY2014 boosted by expected easing of inflation, recovery in the industrial activity and pick up in the services sector as well. D&B expects demand conditions to revive and PFCE to average at around 5.2% during CY2014 after growing by around 2.6% during CY2013.

The impetus to the revival in the investment activity would be driven by the number of mega projects worth Rs 10.00 billion and above cleared by the Cabinet Committee on Investment. We also assume that easing of policy rates following slowing down of inflation to be favorable for investment. Further, post–election improvement in the business sentiment and some further initiations on the reform front will support the investment activity. D&B expects the investment rate to remain subdued at 34.4% during FY14 and witness a slight uptick and average at around 34.9% during FY15.

High inflation leading to a lower real rate of return, high fiscal deficit, moderation in earnings (both for companies as well as individuals) has eroded the savings propensity in the economy. D&B expects the savings rate to average at around 30.0% during FY14 and pick up to around 32.0% during FY15. Abatement of inflationary pressures coupled with increase in income and measures taken by the government and the RBI to channelize flow of funds to financial savings instruments is likely to push up the savings rate during FY15.

D&B expects WPI inflation to moderate to an average of 6.4% in CY2013 and further to 5.8% in CY2014. While demand side pressures to inflation has eased considerably, some improvement in the supply side bottlenecks will aid in subsiding the inflationary pressures.

Given, likely cut in interest rates along with moderation in the headline inflation during second half of CY2014 and the RBI’s measures to support liquidity; D&B expects the 5-year G-sec yield to ease slightly to 7.9% by end CY2014 from around 8.4% by end CY2013.

Given that the domestic consumption demand is likely to have moderated significantly during CY2013 and global growth remains weak and uneven, D&B expects imports to decline by 4.0% and exports to grow by around 5.5% during CY2013. With a likely improvement in the both the domestic and global growth prospects and favourable base effect, D&B expects imports to grow by 12.0% and exports by 10% during CY2014

At the onset of CY2013, green shoots of revival, albeit modest, were visible in some of the parameters for growth.

The drop in WPI inflation to below the RBI’s comfort zone in April-13, for the first time in three-and-a-half-years provided some respite – raising optimism that receding inflation would pave the way for further easing of monetary policy. The 75 basis point (bps) cut in the repo rate by the RBI during Jan-May 2013 also infused hopes that the monetary easing will continue, supporting investment and industrial activity during the year. Nonetheless, the upside risks to growth loomed large, especially with respect to the external sector. Global risks remained elevated in view of the prevailing issues regarding managing the US debt ceiling, escalation of the euro area sovereign debt stress and slowdown in growth in other emerging and developing countries. In the midst of such existing risks, the unanticipated indication of the unwinding of the stimulus measure by the US Federal Reserve emerged as the new threat to the domestic financial markets. Moreover, the uncertainty regarding the timing of the winding up of the Federal Reserve’s bond buying programme led to the outflow of foreign capital and the significant depreciation of the rupee.

The sudden and strong depreciation of rupee since May-13 thwarted all expectations of a revival of the economy in the near term. In fact, the slowdown of the Indian economy turned more profound. GDP growth dropped to a 17 quarters low of 4.4% during Apr- Jun 2013 and the decline in the growth rate was more broad-based. Consumption demand slowed down considerably alongside freeze in investment activities. Supply constraints indicated by the poor performance in the mining output and restrained demand conditions continue to weigh down upon industrial production. The services sector, particularly the trade, hotel, transport and communications segment witnessed a marked deceleration in growth. The perceived lack of commitment and consensus for reforms across the political spectrum and increasing governance concerns spooked investors – domestic and international. Further, WPI inflation yet again breached the comfort zone since Jun-13 and continued to march northwards. The surge in the WPI inflation coupled with double digit retail inflation (CPI) led to a reversal in the monetary policy stance of the RBI. The RBI raised the repo rate by 50 basis points during Sept-13 and Oct-13. Contrary to the expectations that the Indian economy would recover from the current phase of slowdown from the second half of FY14, a number of private organisations revised downwards the growth projections for India to below 5% for FY14.

Confronted with a difficult macroeconomic situation of slowing growth, high inflation and depreciating rupee the government and the RBI had taken a number of corrective measures to support economic growth – Setting up of the Cabinet Committee on Investment for project clearances, liberalisation of FDI in certain sectors, progressive deregulation of administered fuel prices, imposing import duty on gold and platinum and tightening exposure norms for currency derivatives. Even as the government has taken various steps to shore up the currency the pressures on the rupee continue apace.
While the GDP growth for Jul-Sept 2013 quarter stood to be slightly better than the previous quarter, the substantial recovery is not expected during the remaining period of the year. The Indian economy is thus likely to witness a growth rate of around 4.8% during CY2013.