FY15 GDP Forecast Raised to 5.7% but Further Policy Push Required - India Ratings

New Delhi, August 7, 2014: India Ratings & Research (Ind-Ra) has revised its FY15 gross domestic product (GDP) growth forecast to 5.7% from 5.6% (April 2014 forecast). Even though the Union Budget FY15 has addressed certain supply-side issues plaguing the economy, we believe a single budget or one year’s policy reforms are not enough to ensure a non-inflationary, sustained and higher economic growth. Moreover, policy announcements take time to play out.
We expect agricultural growth to drop to 1.3% in FY15 (FY14: 4.7%) on delayed as well as weak monsoon. Although the monsoon’s poor spread over space and time in June 2014 (43% below average) recovered in July 2014, the deficiency continues to be 21%.   
However, we expect industrial GDP growth in FY15 to improve to 5.1% from our earlier estimates of 4.1% (FY14: 0.4%). If achieved, it will be the highest since FY12 (7.8%). The Index of Industrial Production (IIP) grew 4% over April-May 2014. All segments - both at the broad and use based industrial classification - showed positive growth.  Also, the Index of Eight Core Industries grew 4.6% during 1QFY15. Although it still early to call it a trend, we believe this could be the beginning of a broad-based industrial recovery.

On the inflation front, we expect both the Wholesale Price Index as well as the Consumer Price Index based inflation to decline to 5.4% and 7.9%,  respectively, in FY15 (FY14: 6.0% and 9.5%). This is based on the premise that the government would intervene timely and efficiently in the agricultural commodity market, should the prices begin to rise owing to the deficient monsoon.

Our estimate indicates some fiscal slippage in FY15. Consequently, fiscal deficit is likely to exceed the budgeted 4.1% of the GDP and come in at 4.3%. We believe both revenue and disinvestment targets are optimistic. A large part of non-plan expenditure is of committed nature and it is quite likely that the government will overshoot the budgeted targets.

Current account deficit (CAD) is estimated to widen to USD48.7bn (2.2% of the GDP), mainly due to improved industrial growth outlook which will boost imports. However, the financing of the CAD may not prove challenging due to higher capital inflow. In fact, we are expecting accretion to our foreign exchange reserves in FY15 which should lead to the Indian rupee appreciating to 57-58 per US dollar by FYE15.

Despite inflation forecast being revised down slightly, Ind-Ra believes a revenue shortfall will keep fiscal deficit and in turn government borrowings higher than the budget estimate. Therefore, we have retained out forecast on benchmark 10-year G-sec yield at 8.3%-8.4%.
(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research-A Fitch Group Company.)