Indian GDP growth unlikely to recover sharply in FY15: ICRA

Accordingly, we expect Indian GDP growth in FY14 to be around 4.6%, inferior to the advance estimate of 4.9% released by the Central Statistics Office ICRA expects that the pace of growth of real GDP at factor cost eased to 4.4% in Q4FY14 from 4.7% in Q3FY14, with a slowdown in the performance of services and agriculture, offset by a slight pickup in industry. Accordingly, we expect Indian GDP growth in FY14 to be around 4.6%, inferior to the advance estimate of 4.9% released by the Central Statistics Office (CSO). Lead indicators of service sector performance indicate a mixed trend for Q4FY14. The performance of railway-revenue earning freight, cargo handled at major ports, tourist arrivals and services exports improved in Q4FY14 as compared to Q3FY14. Moreover, FII inflows and the pace of growth of incremental credit improved in Q4FY14 relative to the previous quarter. However, the growth of incremental deposits raised in Q4FY14 was sharply lower than Q3FY14, following the closure of the concessional swap window on FCNR (B) deposits on November 30, 2013. Additionally, fiscal restraint by the Central Government is likely to dampen the growth of community, social and personal services. The Third Advance Estimates of crop production indicate a small downward revision in total rabi output as compared to the Second Advance Estimates. Moreover, hailstorms and excessive precipitation in February 2014 had some impact on production of horticultural products, which is likely to have dampened agricultural growth in Q4FY14. In addition, the Index of Industrial Production (IIP) indicates that the manufacturing sector continued to contract in Q4FY14, with a weaker performance of capital and intermediate goods in Q4FY14 offset by some pickup in basic and consumer goods. However, growth of mining output improved slightly to 1.1% in Q4FY14 from 0.5% in Q3FY14, led by a shallower contraction in output of natural gas. Moreover, the pace of growth of electricity generation improved to 7.6% in Q4FY14 from 5.0% in Q3FY14 on account of thermal electricity generation. Food inflation may intensify if risks related to unfavourable monsoon dynamics materialise. As a result, we expect the Reserve Bank of India’s (RBI’s) monetary stance to remain cautious in the upcoming policy review on June 3, 2014. However, with core-CPI stable for three consecutive months, albeit at an elevated 7.8%, a Repo rate hike is unwarranted at this stage in ICRA’s view. Going forward, the expectation of below-average rainfall in conjunction with the structural factors that exert stickiness on food and non-food CPI inflation, suggest that restricting CPI inflation below 8% by January 2015 would be challenging. Accordingly, the most likely scenario at present appears to be an extended pause for policy rates, with monetary easing delayed until at least early-2015. Depending on the eventual monsoon dynamics, agricultural growth in 2014-15 is expected to be muted and range between 0-2%. Rural income growth would also take a cue from factors such as the extent of revision in minimum support prices (MSP). However, substantial growth in the latter would add to food inflation and curb urban disposable incomes. The improvement in consumption demand in FY15 is likely to be limited by sticky interest rates. However, certain sectors like PV and M&HCV are likely to record a positive growth in FY15 given the pent up demand following the sustained contraction in FY14, which would support a mild improvement in the growth of the manufacturing sector. Sentiments have improved substantially post the strong verdict in the 2014 Parliamentary Elections, fuelled by expectations that speedy reforms would revive the business climate and consumer confidence. In ICRA’s view, the pace of pickup of investment activity would now take a cue from the resolution of a number of existing concerns , including ease of land acquisition, approvals from State Governments, high leverage levels of developers etc. Overall, ICRA believes that GDP growth has bottomed out in H1CY14, and expects a mild improvement in the same from 4.6% in 2013-14 to 5.0-5.5% in 2014-15, factoring in a muted pickup in manufacturing growth and investment activity in H2FY15. However, the extent and pace of reforms, and ability to revive the investment cycle, would determine whether GDP growth can accelerate to levels well above 6% over the medium term. The Budget for 2014-15 is likely to articulate the priorities of the new Government, both in terms of spending as well as raising revenues. With regard to project expenditure, there is likely to be some lag before which new schemes are designed and implemented. Moreover, provision of funds for implementing projects as well as capital infusion into Banks would widen the fiscal deficit and crowd out the private sector. It is therefore imperative for Government of India (GoI) to create fiscal space through trimming of unproductive schemes, reduction of leakages and paring of subsidy expenditure or raising resources through improved compliance or sale of GoI’s stake in various PSUs. Greater clarity on the approach to tax reform, including the goods and services tax (GST) and direct taxes code as well as disinvestment are awaited. Additionally, measures to reduce subsidies for diesel, kerosene, LPG and fertilisers remain to be seen.