economic outlook survey - ficcificci.in/sedocument/20278/eos-january-2014.pdf · outlook on rbi’s...

Economic Affairs and Research Division

Economic Outlook Survey

January 2014

Highlights Results of FICCI’s latest Economic Outlook Survey point towards continued signs of moderation in economic activity. The survey results indicate GDP growth to slow down to 4.8% in the current fiscal year, which is marginally lower than the 5.0% estimate put out in the last survey. However with regard to quarterly growth, the participating economists’ expect Q3 FY14 GDP growth to be slightly better at 5.0% vis-à-vis 4.8% growth clocked in Q2 FY14. Economists’ outlook for industrial sector remained weak for the current fiscal owing to persistent weak demand and lackaidisical investments. The Index of Industrial Production (IIP) is estimated to grow by 1.5% in FY14 below than 1.7% projection in the previous survey round. On the inflation front, economists have revised their projection upward to 6.5% for FY14 from 6.0% projected in the last survey due to rising food and fuel prices. On the external front, situation has improved discernibly and the estimated CAD to GDP ratio has been revised downwards. The ratio is estimated at 1.9% for Q3 FY14, much lower than 4.5% estimated in the previous round. Further, it is projected at 3.0% for the year 2013-14 lower than the revised PMEAC target of 3.8%. To carry forward this impetus and to keep CAD within manageable levels, exports need to grow at near double digits for the coming months, felt the participating economists’. On the policy announcement, participating economists’ have foreseen the key policy rate to adjust at 8.0%, hinting towards a rise by 25 bps in January 2014. With regard to outlook on Rupee value, participating economists 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. We also asked the participating economists’ to highlight the key reforms that need to be carried out to elevate the growth trajectory. A majority of the economist pointed towards the implementation of Goods and Services Tax (GST), reforms in fuel and gas pricing and a further push to banking reforms.

Survey Profile

The present round of FICCI’s Economic Outlook Survey was conducted in the months of November / December 2013 and drew responses from leading economists primarily from the banking and financial services sector. The economists were asked to provide their forecast for key macro economic variables for the year 2013-14 as well as for Quarter 3 (Oct - Dec) and Quarter 4 (Jan – Mar) of 2013-14. In addition, FICCI sought views of the economists on some topical issues like RBI’s policy stance, sustainability of exports growth, volatility in Rupee value and the key reform priorities going ahead.



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, nonethless 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 pervious 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%).

Survey Results – Projections for key macro-economic variables*

Annual Q3 FY14 Q4 FY14

Growth Median Min Max Median Min Max Median Min Max

GDP 4.8 4.5 5.3 5.0 4.5 5.6 5.2 4.6 5.5

Agriculture & Allied 3.8 3.2 6.0 4.6 2.7 6.2 4.7 2.7 5.2

Industry 1.5 1.2 4.2 2.4 1.4 3.5 2.7 1.2 4.1

Services 6.3 4.2 8.0 6.4 3.5 7.3 6.3 4.1 8.3

1.4

2.0 2.1

2013-14 Q3 FY14 Q4 FY14

IIP Growth Forecast (%)

6.5

7.0

6.7

2013-14 (end March 2014) Q3 FY14 (end Dec 2013) Q4 FY14 (end Mar 2014)

WPI Growth Forecast (%)

5.0

4.24.4

2013-14 Q3 FY14 Q4 FY14

Fiscal Deficit as % of GDP Forecast

*The findings of the survey represent views of leading economists and do not reflect views of FICCI. All forecasts represent median values.



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).

Survey Results

7.38.0

6.5

2013-14 Q3 FY14 Q4 FY14

Merchandise Export growth (%) Forecast

-4.4

-7.0

-4.5

2013-14 Q3 FY14 Q4 FY14

Merchandise Import growth (%) Forecast

3.0

1.9

3.0

2013-14 Q3 FY14 Q4 FY14

CAD as % of GDP Forecast

61.3

62.0

61.7

2013-14 (end March 2014) Q3 FY14 (end Dec 2013) Q4 FY14 (end Mar 2014)

Exchange rate (Rs/USD)

4.0

4.8

4.5

2013-14 Q2 FY14 Q3 FY14

Current Account Deficit as % of GDP

62.0

67.0

65.1

2013-14 (end March 2014) Q2 FY14 (end Sept 2013) Q3 FY14 (end Dec 2013)

Exchange Rate (Re/USD)



VIEWS OF THE ECONOMISTS

OUTLOOK ON RBI’s STANCE IN THE FORTHCOMING POLICY ANNOUNCEMENT

Though the Central Bank maintained status quo in the mid quarter monetray policy review announced on December 18, 2013, 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 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. Economists’ foresee the key policy rate to adjust at 8.0%, hinting towards a rise by 25 bps by January 2014.

SUSTAINABILITY OF EXPORTS GROWTH

Exports witnessed a distinct rebound in growth between July and November 2013. This was on the back of a host of factors like depreciation of Rupee, an improvement in the external situation with demand conditions in the US and Euro area seeing a turn around and Government announcing some measures recently to suport export growth. Also, the low base partly contributed to the good performance. The economists were of the view that this growth will be carried forward for the next few months. Nonetheless, some amount of uncertainty remains and downside risks to growth still prevail. It was mentioned that while exports could continue to post positive growth, prevalence of high growth rates cannot be assumed with assurance. Latest data on exports for December 2013 seem to confirm this view of the economists. Further, we need to have a long term perspective in mind to ensure sustainability of our exports. Factors like success of SEZ policy, adoption of flexible labour laws, overcoming infrastructure bottlenecks, making Indian products more competitive in the global market and a stable macroeconomic outlook in terms of stable exchange rate and declining inflation and interest rates etc will be imperative. Also, what India needs is a major infrastructural boost to augment its manufacturing sector. The Rupee depreciation has helped exporters, but stubborn inflation has been exerting pressure on the cost of manufacturers, particularly for the small and medium sized exporters. Rising domestic interest rates for pre and post shipment credit might be another irritant for exporters. Therefore, in the medium to long run the export performance might start sputtering once again, unless these issues are sorted out.

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OUTLOOK ON RUPEE VALUE

The Rupee value witnessed sharp volatility this year, falling by 20% since the beginning of the year 2013 and touched a life time low of 68.85 for a dollar on August 28, 2013 owing to the widespread speculation about US Federal Reserve tapering its quantitative easing programme. This sudden depreciation in Rupee value also fuelled concerns over the current account situation. Nonetheless, with both Government and RBI soming into action, the Rupee stabilised and there has been a significant improvement in the current account deifcit numbers as well. A majority of the participants felt that the Rupee value has bottomed out and is around its fair value. Even with the recent tapering announced by US, the Rupee value remained stable. With a lower current account deficit and some replenishment of reserves through the measures announced, we have been able to handle the announcement in a much better way. The Rupee value should settle down around 61-62 towards the end of this year. Also, with the easing of nuclear sanctions, Iran is expected to enter the crude oil market with oil supplies equivalent to that of the larger oil supplier Saudi Arabia and this can lead to substantial reduction in crude prices, with consequential fall in our oil import bill which will lead to strengthening of the Rupee and other fundamentals.

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KEY POLICY REFORMS Participating economists’ were asked to indicate the top three priorities that should be pursued by the government to further the reform agenda. It was indicated that the manufactrung sector, which can be the key source for creating jobs should be given an impetus. Some of the key reforms that were highlighted included:

Implementation of Goods and Service Tax (GST) Further strengthening the financial markets to support the growing needs of the industry. There is a need to

deepen the debt market. Also, insurance sector reforms are imperative Improve agri-marketing and distribution infrastructure including godowns, cold storages, APMCs reform. This will

not only reduce inflation, but will also increase supplies through less wastage Labour reforms Fuel and gas price reforms

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Appendix

Outlook 2013-14

Key Macroeconomic variables Mean Median Min Max

GDP growth rate at factor cost (%) 4.8 4.8 4.5 5.3

Agriculture & Allied 4.1 3.8 3.2 6.0

Industry 1.9 1.5 1.2 4.2

Services 6.3 6.3 4.2 8.0

Fiscal Deficit (as % to GDP) Centre 4.9 5.0 4.5 5.2

Growth in IIP (%) 1.5 1.4 1.0 2.8

WPI Inflation rate (%) 6.5 6.5 6.0 7.5

US$ / INR exchange rate 61.1 61.3 54.0 64.5

CAD (as % to GDP) 3.1 3.0 2.2 3.8

Money supply growth M3 (%) 13.6 13.4 12.8 17.2

Bank credit growth (%) 15.0 15.2 13.5 16.0

Outlook Q3 FY 2013-14

Mean Median Min Max



Industry 2.4 2.4 1.4 3.5

Services 6.1 6.4 3.5 7.3


Growth in IIP (%) 2.0 2.0 1.5 3.0



CAD (as % to GDP) 2.5 1.9 1.8 4.0



Outlook Q4 FY 2013-14

Mean Median Min Max



Industry 2.7 2.7 1.2 4.1

Services 6.5 6.3 4.1 8.3


Growth in IIP (%) 2.5 2.1 1.8 3.7



CAD (as % to GDP) 3.0 3.0 2.0 3.8



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