Headline CPI inflation is expected to remain above 9 per cent in Q4 of 2013-14 and range between 7.5 to 8.5 per cent in Q4 of 2014-15
Various surveys, including the Reserve Bank's Industrial Outlook Survey, show that business confidence has started to rebuild. On current reckoning, growth in 2013-14 is likely to fall somewhat short of the Reserve Bank's earlier projection of 5.0 per cent. However, after subdued activity in H1 of 2013-14, growth may improve a tad in H2 on the back of a rebound in agriculture output and improved export performance. However, industrial growth continues to languish and most segments of the services sector continue to underperform. Clear signs of a pickup are yet to emerge, though with some improvements in the business climate, modest recovery is likely to shape up in 2014-15. A moderate paced recovery is likely to shape in the next year with support from rural demand, a pick-up in exports and some turnaround in investment demand. The growth in 2014-15 is likely to be in the range of 5 to 6 per cent, with likelihood of it being in higher reaches of this forecast range as project clearances translate into investment, global growth outlook improves, and inflation softens.Inflation declined significantly in December 2013, both in terms of the CPI and WPI, driven by falling food prices which had firmed up considerably during April-November. Despite the moderation, CPI inflation continued to remain high near 10 per cent with inflation excluding food and fuel components also persistent at 8.0 per cent. Despite moderation in December and some further softening expected in near term, inflation risks have to be watched carefully as we enter into the next year. This is due to upward revision in domestic energy prices, expected growth acceleration, structural bottlenecks affecting food inflation and adverse base effects. In 2014-15, slow paced inflation moderation amidst sticky prices could continue. Based on the assumptions of the normal rainfall, some cost pressures from administered fuel price increases, elevated rural wages, supply chain bottlenecks and still heightened inflation expectations, headline CPI inflation is expected to remain above 9 per cent in Q4 of 2013-14 and range between 7.5 to 8.5 per cent in Q4 of 2014-15, with the balance of risks tilted on the upside.
Aggregate demand in the economy exhibited some improvement during Q2 of 2013-14 mainly on account of a surge in net exports. However, total consumption expenditure decelerated over the previous quarter on account of a decline in government consumption expenditure. Private consumption expenditure, the mainstay of aggregate demand stayed low in the face of high inflation with subdued discretionary demand. Investment demand improved somewhat during the quarter but the investment cycle is yet to witness a turnaround. On the whole, corporate sales improved during Q2, although some major industries continued to experience contraction in sales. Overall aggregate demand is expected to receive support in H2 of 2013-14 due to the favourable impact from rural demand and exports, though downside risks will emanate from public spending cuts. A pickup in demand in the coming year depends critically on the successful resolution of bottlenecks facing infrastructure projects.
The government has reiterated its commitment to meeting the budgetary target of 4.8 per cent of GFD/GDP in 2013-14. This may require further cutbacks in expenditure if the revenue and nondebt capital receipts do not meet budgetary targets. It is also important to create a fiscal space in 2014-15 to support public investment by restraining revenue spending, so as to crowd-in private investment. The task remains challenging and, inter alia, will require poorly targeted subsidies such as cooking gas and diesel (centre) and electricity (states) to be rationalised. While diesel prices have been increased steadily, subsidy on gas cylinders remains large. Adhering to fiscal discipline hinges upon the ability to withstand pressures to increase subsidies, including those on fuel and public utilities.
Consequent upon the shrinking of the trade deficit, the CAD declined from 4.9 per cent of GDP in Q1 to 1.2 per cent of GDP in Q2 of 2013-14. The full year CAD is likely to be contained within the sustainable level of about 2.5 per cent of GDP.
The Fed tapering announcement on December 18, 2013 did not exert significant pressures on equity and bond markets across the globe. Unlike the May 22 situation when the tapering announcement unnerved markets, this time around, Indian markets withstood the announcement better than other emerging market peers, having utilised the interim period to re-build buffers. Encouraging news on the trade front along with return of capital flows appears to have abated the pressures on the Indian rupee. However, going forward, markets will be conditioned by political outcomes and the commitment to reforms.
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