ICRA expect WPI inflation to average 7.5-7.7% in
FY13, while revised down its GDP growth forecast for FY13 to 5.4% from
previous expectation of 5.7%
Although measures such as the revision in the price of diesel and easing of norms for Foreign Direct Investment (FDI) in various sectors initiated since September 2012 boosted investor sentiments and aided in a strengthening of the Indian Rupee, the currency has weakened sharply in the past month, adding to macroeconomic uncertainties.
To an extent, a narrower-than-expected shortfall in south-west monsoon rainfall has assuaged concerns regarding food inflation. Nevertheless, an anticipated rise in food inflation in the coming months based on an adverse base effect and higher minimum support prices (MSP) for rabi crops would keep inflationary expectations elevated. Despite the considerable slowdown in economic growth over the last 15 months, core inflation remains above 5%. In our view, a weaker Rupee and a generalization of inflationary pressures related to high food prices would result in core inflation remaining firm. ICRA continues to expect WPI inflation to average 7.5-7.7% in FY13.
The pace of growth of real GDP at factor cost is likely to have eased to 5.0% in Q2FY13 from 5.5% in Q1FY13. While the weak monsoon onset and late sowing are likely to have dampened yields, heavy rainfall in mid-August to mid-September 2012 may have adversely impacted the standing crops. As against a 2% shortfall in sowing, the First Advance Estimates of Crop Production released by GoI indicate a 7% decline in the production of kharif crops, which suggests that growth of agriculture & allied activities is likely to be low in the second half of 2012.
The Index of Industrial Production (IIP) indicates a marginal upturn in the growth of the manufacturing and mining & quarrying sectors in Q2FY13. However, a moderation in growth of cement and steel output suggests a deceleration in construction growth in Q2FY12 relative to the previous quarter. As compared to the forecast of 3.0% industrial growth in H1FY12, a favorable base effect is expected to boost industrial growth to 5.4% in H2FY13. Lead indicators of service sector activity such as air passenger and cargo traffic; cargo handled at major ports; and railway revenue earning freight traffic suggest a mixed trend for Q2FY13.
Given the absence of a pickup in private investment activity despite an improvement in sentiments; low transmission of the reduction in the cash reserve ratio (CRR) since September 2012; expectations of back-ended cut in the Repo rate (reduction of 50 bps in Q4FY13); and moderating consumption demand, ICRA has revised its forecast for GDP growth for FY13 to 5.4% from the previous expectation of 5.7%.
GoI's fiscal deficit is expected to exceed the revised target of 5.3% of GDP in the current fiscal year, in light of the substantial under-recoveries on various regulated fuels already incurred in H1FY13; limited flexibility to control various types of expenditure; and the likelihood of both tax and non-tax revenue receipts falling short of the budgeted amount. Assuming that fuel subsidies for Q4FY13 are released in FY14 and disinvestment proceeds amount to Rs. 200-250 billion in FY13, GoI's fiscal deficit is expected to be around 5.6-5.7% of GDP in 2012-13, inferior to the revised target of 5.3% of GDP. ICRA expects the slippage in GoI's fiscal deficit relative to the Budget Estimates (BE) for 2012-13 to be funded by an enhancement in the announced long-term market borrowing programme for Q4FY13 by Rs. 400-500 billion.
Notwithstanding the impact of a weaker Rupee on competitiveness, demand for Indian exports is expected to remain muted in H2FY13, reflecting global economic conditions. Additionally, the impaired availability of power for industrial usage in some regions may constrain the ability of exporters to ramp up production levels. The unfavourable monsoon is expected to moderate the growth of agricultural incomes and rural demand for gold in 2012-13. Nevertheless, gold imports are expected to rise in H2FY13 relative to H1FY13, reflecting the festive season demand. Additionally, domestic supply constraints are expected to boost the demand for imports of items such as coal, natural gas and iron ore in 2012-13, enlarging non-oil imports. We have revised our expectation of the current account deficit for FY13 to USD 70 billion (3.8% of GDP), slightly higher than our previous forecast of USD 69 billion (3.7% of GDP).
A significant USD 22 billion of external commercial borrowings (ECBs), which accounted for around 30% of India's external debt of USD 350 billion at end-June 2012, is classified as short term debt by residual maturity, posing substantial refinancing risks for the Corporate sector. Additionally, the rise in short-term external debt and decline in reserves has contributed to deterioration in short-term debt by residual maturity to 52% of foreign exchange reserves at end- June 2012 from 42% at end-March 2011.
Considerable capital inflows are required to fund the current account deficit and refinance maturing external debt in the current fiscal year; the extent of capital inflows into India would be closely linked to both global trends regarding liquidity and risk aversion as well as investors' sentiments regarding Indian macro-economic fundamentals.
The Repo rate is likely to be reduced by a further 50 bps in the remainder of the current fiscal year, the timing of which would be guided by growth-inflation dynamics. At present, ICRA expects the Central Bank to reduce the CRR by 25 bps in the December 2012 mid-quarter policy review to ensure credit flow to productive sectors.
In the absence of substantial room for monetary easing in FY13 or fiscal space for enhancing public investment to stimulate economic growth, resolution of various regulatory issues and passing of key Legislations such as the proposed Land Acquisition, Rehabilitation and Resettlement Bill is vital to improve sentiments, boost investment activity and ease the supply-side pressures in the Indian economy.
