The key policy rate to adjust at 8.0%, hinting towards a rise by 25 bps by January 2014
FICCI's latest Economic Outlook Survey has pointed towards continued signs of moderation in economic activity. Survey results indicate a GDP growth of 4.8% for FY 14 which is less than 5.0% growth indicated in last survey. The estimate for GDP growth ranged from 4.3% (minimum) to 5.3 % (maximum). Quarterly GDP growth slowed to 4.4% in Q1 FY14, which was the slowest in almost four years, nonetheless some recovery was noted in Q2 numbers. This recovery is likely to continue in the second half of the fiscal year with economists expecting 5.0% growth in Q3 FY14.Agricultural sector is expected to perform well, with a forecast of 3.8% for FY14. However, slow pace of growth in industry sector will continue to persist. Survey results indicate a median forecast of 1.5% in FY 14, with a range from 1.2% (minimum) to 4.2% (maximum).
Further, IIP growth estimate was revised down to 1.4% in FY14; this was marginally lower than 1.7% estimate put out in the previous survey round. The growth ranged from a minimum of 1.0% to a maximum of 2.8%. The forecast for Q3 FY14 is 2.0% (minimum of 1.5% and maximum at 3.0%) and for Q4 FY14 is 2.1% (minimum at 1.8% and maximum at 3.7%).
Inflation rate is expected to be at 6.5% in FY14 (end-March 2014) with a lower and upper limit forecast of 6.0% and 7.5%. Owing to steep rise in inflation both at the wholesale and retail level in previous months, economists are foreseeing a high rate of inflation for Q3 and Q4 FY14. WPI is expected to be around 7.0% in Q3 FY 14 (minimum at 6.4% and maximum 7.2%) which is much above the previous projection of 5.5%.
Forecast for fiscal deficit as a percentage of GDP for FY14 stood at 5.0%. Government is targeting a fiscal deficit of 4.8% but it seems difficult to achieve owing to rising expenditures and slow growth in tax revenues.
Economy seems to be cushioned on the external front with a robust pick up in export growth and declining imports since the second quarter FY14. Economists have pegged the export growth at about 8.0% for Q3 FY14, whereas imports are projected to grow by (-) 7.0% in the same quarter. CAD as % of GDP is estimated at 3.0% in FY14, according to survey results.
The Rupee value is projected at 61.3 against US dollar by end March 2014. The currency has been floating in a stable range of 61-62 since mid-September 2013. However, owing to market volatility and domestic weakness economists have pegged the rupee value at 62.0 for Q3 FY14 with a range of 61.5 (minimum) to 63.5 (maximum).
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With regard to outlook on Rupee value, participating economists in the survey felt that the corrective measures taken by RBI and government ensured that free fall in Rupee was curbed. Participating economists' said that at present Rupee value is hovering around its fair value and is expected to remain below 65 against dollar till end March 2014. Even with the recent tapering announced by US, the Rupee value remained stable. With continuous equity inflows coming from the foreign institutional investors and build up of the foreign exchange reserves, the Rupee value will remain stable.
A majority of the economists, highlighting the key reforms that need to be carried out to elevate the growth trajectory, pointed towards the implementation of Goods and Services Tax (GST), reforms in fuel and gas pricing and a further push to banking reforms.
The participating economists in the survey felt that going ahead a 25 basis point increase in repo rate looks imminent. This would largely be on account of continuous pressure arising from the inflation side, with both WPI and CPI continuing to remain high. Economists' foresee the key policy rate to adjust at 8.0%, hinting towards a rise by 25 bps by January 2014.
Economists felt that while inflationary pressures are emanating due to supply side constraints with food and fuel segments being the primary contributors to overall inflation; the spillover effect is likely to impart upside pressure on prices of other commodities and services.
The survey participants said that measures taken by RBI will not solve the inflation problem and that the real solution lies in addressing the supply side bottlenecks. Both the Government and RBI need to work in tandem to bring forth the policies for better supply chain management to hold back food inflation and lower the policy rate to stimulate industrial production. The continuous hike in key policy rates has adversely affected the investment climate in the country. This is reflected in the slow growth in investments, capex plans of corporates and weak IIP and overall growth numbers. The LAF window should be opened further to allow more liquidity in the system to provide an uptick to corporate lending.
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