ICRA expects that the pace of growth of real GDP at factor cost improved somewhat to 5.0% in Q4FY13 from 4.5% in Q3FY13, primarily reflecting a slight improvement in the growth of services and agriculture. Lead indicators of the services sector suggest a small uptick in growth in Q4FY13.
Headline and core inflation related to the Wholesale Price Index (WPI) have moderated substantially in recent months even as retail inflation has recorded a limited decline. A favourable monsoon may dampen food inflation to 6.5-7.0% in 2013-14 from ~10% in 2012-13. Moderation in prices of some industrial inputs and weakening pricing power are expected to result in core inflation remaining moderate at 3.5-4.0% over H1FY14, unless demand pressures resurface. Overall, WPI inflation is likely to average 5.7-6.2% in 2013-14, as compared to ~7.4% in 2012-13.
Although moderating commodity prices, weakening pricing power and the forecast of a normal monsoon suggest that inflation is likely to ease in 2013-14, structural factors that have contributed towards high inflation in India are yet to be resolved. Additionally, the current account deficit is expected to remain uncomfortably large, despite the anticipated reduction in FY14. Accordingly, a cautious approach towards monetary easing is warranted in ICRA's opinion, with Repo rate cuts limited to a further 50 bps over the remainder of 2013.
ICRA expect the current account deficit to decline to 4.5% of GDP (~USD 94 billion) in 2013-14 from 5.0% of GDP (~USD 92 billion) in 2012, while remaining unsustainably high. This is based on the expectation that incentives announced by GoI would provide a limited boost to non-oil, non-jewellery merchandise exports; the pace of growth of imports of capital goods would remain subdued in H1FY14 pending a pickup in investment activity; and lower crude oil prices would dampen growth of oil imports.
The size and funding of the current account deficit in FY14 is likely to remain a key concern for the RBI, as macroeconomic and political uncertainties may result in sporadic portfolio outflows and foreign direct investment (FDI) inflows may not record a broad-based pickup until after the Parliamentary elections, in spite of the reforms announced since September 2011. While deregulation of interest rates on Non-Resident External (NRE) and Non-Resident Ordinary (NRO) Accounts by the RBI in December 2011 contributed to a surge in inflows in 2012-13, additional NRI Deposits are expected to be moderate in FY14 in line with a likely softening of domestic deposit rates. Moreover, the sizable short-term external debt stock continues to pose refinancing risks, even as the recent depreciation of the Rupee would add to the costs of debt servicing.
While the fiscal deficit target for 2013-14 of 4.8% of GDP has been adhered to in the Budget Estimates (BE), the underlying assumptions of a 13.4% economic growth in nominal terms, sharp pickup in revenues from telecom and containing the total subsidy bill at Rs 2.3 trillion may be tested over the course of the year. Based on ICRA's estimate of a spillover of fertiliser subsidy of ~Rs 300 billion from 2012-13 to 2013-14, the budgeted subsidy for 2013-14 of Rs 660 billion is likely to be underestimated. This is despite the lower subsidy announced for primary nutrients (nitrogen, phosphorus and potash) under the nutrient-based scheme for 2013-14, which would lead to a decline in subsidy for non-urea fertilisers in line with the fall in global prices for key inputs. Movements in the price of crude oil and the exchange rate as well as the timing and extent of revision of the retail diesel price by the oil marketing companies (OMCs) would critically influence the level of under-recoveries of the OMCs for the coming quarters. Moreover, the release of the balance fuel subsidy for FY13 and the proportion in which under-recoveries for FY14 are shared between the upstream and downstream oil & gas companies and GoI would impact the fuel subsidy bill of the latter. While the budgetary allocation for food subsidy for 2013-14 includes a provision of Rs 100 billion towards the funding required for the implementation of the National Food Security Act (NFSA), the magnitude of funding required in the current fiscal year would depend on the date of introduction of the expanded entitlements.
The growth of the quantity of crude oil imports is likely to ease in FY14, based on the expectation of reasonably regular monthly revisions in diesel prices for retail consumers and a normal monsoon in 2013 reducing the demand for diesel from the agricultural sector to draw groundwater using tubewells. While India's reliance on energy imports (crude oil, coal and natural gas) is likely to rise considerably in the near-to-medium term, the moderation in global commodity prices would soften the increase in the commodity import bill in FY14. In spite of the hike in customs duty to 6% from 4% and restriction on import of gold on consignment basis by Banks, the decline in gold prices is likely to boost consumption demand, thus limiting the fall in volume of gold imports in FY14. At present, ICRA expects merchandise imports to expand by 3-5% in 2013-14.
Improved growth prospects for certain Advanced Economies and diversification to newer markets, suggest a moderate improvement in growth of merchandise and services exports in the current fiscal. However, the competiveness arising from a weaker Rupee as compared to the currencies of various export-oriented East Asian economies continues to be eroded by the infrastructural deficits prevailing in the country, which raise the costs of production and constrain the ramping-up of exports. While non-oil non-jewellery exports may display a moderate growth in 2013-14 buoyed by the incentives announced by GoI, lower crude oil and gold prices would dampen the growth of POL and jewellery exports in value terms. ICRA expects merchandise exports to display a muted 4-7% growth in 2013-14.
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