V-shaped Recovery of Economy Unlikely - India Ratings

New Delhi, January 14, 2014: India Ratings & Research (Ind-Ra) expects India’s gross domestic product (GDP) growth to improve to 5.6% in FY15. Our expectation for improved growth in FY15 is based on a partial recovery in the industrial and services sector growth, and an uptick in investment due to project clearances by the Cabinet Committee on Investment (CCI). However, given the sluggish domestic and external environment, Ind-Ra believes that unlike the recovery witnessed during the aftermath of the 2008 global financial crisis, the FY15 recovery is likely to be gradual. In other words, the probability of a V-shaped recovery is nearly zero.

The outlook for the Indian economy is now looking significantly better than what it did in mid-2013 when the economy was struggling with current account and fiscal deficit, falling rupee and high and stubborn inflation. Better-than-expected monsoons, rising exports, swift policy as well as project clearance actions by the government and deft currency management by the Reserve Bank of India (RBI) have improved business sentiments. The most noteworthy turnaround has been witnessed in the case of current account deficit (CAD) which is likely to settle at around 2.2% of the GDP in both FY14 and FY15. This will support the rupee which is likely to appreciate from the current levels to 56-57/USD by end-March 2015.

Agricultural growth is likely to return to the trend growth rate of 3% in FY15 from the estimated 4.7% in FY14. Ind-Ra expects industrial growth to improve to 4.1% in FY15 (FY14 revised estimates: 1.7%) helped by rural consumption and exports demand. Stable agricultural growth in FY15 is likely to keep rural demand strong. Exports grew at 5.9% over April-December 2013 as against a contraction of 4.0% during the same period last year. Exports are likely to continue to grow in FY15 due to an economic recovery, though still fragile, in the US and eurozone.        

The central government’s fiscal deficit during the first eight months of FY14 touched 94% of the budgeted target. However, there are indications that the government, like in FY13, will cut the capital and planned expenditure substantially to cap the fiscal deficit closer to the budgeted target despite the forthcoming parliamentary elections in May 2014. Ind-Ra does not expect even the new government to splurge and therefore expects FY15 fiscal deficit to be 4.5% of GDP.  

The agency expects the average inflation in FY15 to be 5.5%, lower than 5.9% in FY14. Although this will still be outside the RBI’s comfort zone of 5%, it will provide room for the RBI to cut policy rates by 50bp in FY15. A cut in the policy rate and an improvement in liquidity conditions (due to gradual unwinding of RBI’s extraordinary measure since mid-September 2013) could help the 10-year G-sec rate to settle at around 8.0%-8.1% by FYE15.

Despite moderation in inflation, Ind-Ra does not expect consumption demand to pick up sharply in FY15. However, it expects investment to gather some pace and grow at 6.2% in FY15 in view of an improvement in the critical macroeconomic indicators of the economy, passage of pending crucial economic bills in the Parliament and clearing of some mega investment projects by the CCI.

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)