india outlook 2013 14 report

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Contents

Preface ..................................................................1

Economic Journey FY13 .......................................2

Economic Outlook FY14 ....................................10

Special Article .....................................................15

Some Concerns to Growth ................................ 17

D&Bs Key Macroeconomic Forecast .................18


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Preface

Growth of the Indian economy during FY13 has decelerated faster than what D&B had envisaged in April

2012. Policy drift, persistent inflationary pressures and subdued global demand were primarily responsible

for growth turning out to be weaker than anticipated. The economy is now at a critical stage where the

revival is contingent on how quickly policy correctives are put in place to address structural bottlenecks and

encourage investment.

Our economic expectations for the current fiscal are modest at best. Over the short term, global uncertainty

is likely to hold back higher growth. The strength of the domestic economy, however, will help renew growth.

The easing of monetary policy by the RBI since January 2013 will also aid in the restoration of the investment

and hence the industrial activity. A recovery, even if modest, still appears possible if certain key policy reforms

are implemented on an urgent basis. This could go a long way in stimulating investment and reviving business

sentiment.

As the economy navigates its way through the next 12 months, a host of factors will continue to place strain on

economic activity. These include political uncertainty, unhealthy fiscal situation and policy and administrative

uncertainty on the part of the government.

It has become imperative for businesses to track the economic environment on an ongoing basis when changes

come in such a dynamic fashion; when perceptions on where macroeconomic risks lie are so numerous and

changing so often; when the immediate business environment becomes so closely linked with events that are

largely beyond our immediate control. This report has been prepared with the idea of providing a forecast

of key macroeconomic variables, which will determine the course of the business environment over the nextfiscal.


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The slowdown in growth which prevailed during

FY12 continued during FY13 as well. Belying all

expectations of some recovery during the second

half of the fiscal year, the downturn in growth

intensified as the year passed by. Indias GDP during

FY13 is estimated to have recorded the lowest

growth during the last ten years. However, unlike

the slowdown encountered during 2008 crisis,this time around the slowdown was broad based

with private consumption demand, the primary

factor behind the revival of the economy during

FY11, weakening considerably. Moreover, the fiscal

stimulus and the rapid growth which fuelled demand

without considerable attention paid to augment the

supply-side channels led to high and sticky inflation.

Persistent inflationary pressures, policy drift, low

business confidence and stalled investment activity,

fall in the savings rate and high fiscal and currentaccount deficit had dented the growth momentum.

Not only the RBI or the Government, all the

major institutions, domestic as well as foreign had

significantly scaled down the growth projection of

India. The Planning Commission scaled down the

average annual growth target of the economy to

8.0% from 9.0% conceived earlier for the Twelfth

Five Year Plan. The severity of the domestic issues

compounded the external threat posed by theturmoil in the global economy. The Euro Zone still

continues to remain mired in recession, slower than

expected recovery of the US economy, deepening

economic crisis in Japan, moderation in growth in

China coupled with slowdown in other emerging

countries.

Weak global economic activity has impacted the

services sector immensely which had remained

resilient so far. The significant slowdown of the

services sector which accounts for around 56% of

the overall growth of the Indian economy is a cause

of serious concern. Ballooning trade deficit and

fall in primary income mainly owing to increase in

investment income payments due to servicing ofrising external liabilities has exacerbated the current

account deficit (CAD) during FY13. The current

account deficit has risen to around 6.7% during Q3

FY13 well above the sustainable threshold of 2.5 to

3.0%. Financing the huge CAD is a serious concern

as most of it is covered by short term and volatile

portfolio inflows.

Foreign direct investment has fallen compared with

a year ago due to sluggish economic growth, hurdlesin getting approvals and worrying tax issues. While

equity inflows have gone up significantly following

the quantitative easing adopted by several countries.

As a result Indias external liabilities have increased.

Data on external debt shows that the ratio of short

term debt to external debt stood at 24.4%, the

highest since March 1991, reflecting the vulnerability

of Indias external payment situation. Despite various

measures undertaken by the government including

export diversif ication, exports fell during FY13. Withimport demand for oil and gold remaining inelastic

despite slowing growth, trade deficit increased

considerably. With the government curbing down its

spending to rein in the fiscal deficit, the community,

social & personal services segment of the services

sector is expected to grow modestly during the

second half of FY13. Further, the continuous

deceleration in the industrial growth had also

weighed down the services sector as evidenced

Economic Journey FY13


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in the significant moderation in the trade, hotels,transport and communication segment.

The sustained deterioration in the industrial sector

has larger implications in terms of creating of jobs

to absorb the growing working population in India.

Industrial growth remained subdued since July

2011 due to the lack of significant policy reforms,

regulatory hurdles limiting investment, supply and

infrastructure bottlenecks, high input prices, lack of

demand - both domestic and external and low businessconfidence. While, growth has been weak across all

industrial segments, contraction in the capital goods

and mining had in particular largely impacted the

industrial output. Decline in mining output since Q2

FY12 (except during the months of Jul-11, Feb-12 and

Sept-12) primarily due to regulatory and

environmental issues had adversely impacted the

manufacturing sector. Shortages in coal supply

along with uneven monsoon had led to moderation

in the power generation which in turn had affected

the production activities, especially of the small and

medium-scale industries. Besides high input cost,

bleak investment scenario and most importantly

clouded domestic policy environment had led to

the deterioration in the industrial production. Low

credit disbursement, on account of high interest

rates, risk aversion by banks due to rising NPA levels

and low mobilisation of deposits, had also impacted

the investment as well as the industrial production.

During FY13 (upto end-Dec-13) the number of

projects being shelved or stalled had increased

significantly.

Despite weak industrial activity, RBI was unable to

lower the interest rates as inflationary pressures

remained stubbornly high. Although, RBI reduced

the repo rate by 50 basis points during April 2012,

ending its tight monetary policy stance, it paused

thereafter as the upside risk to the headline inflation

loomed large given the incomplete pass-through

of the global oil prices, rupee depreciation and theuptrend in the food prices which in turn had the

potential to feed through into core inflation. WPI

inflation remained above 6.0% since December

2009 till February 2013 i.e. for 39 months. The

RBI decided to cut the policy repo rate in January

2013 and again in March 2013 as overall growth

decelerated strongly, WPI inflation started easing

and core inflation moderated substantially indicating

cooling down of demand side pressures to inflation.

In conjunction with slowdown in industrial and

services sector, the other factor which failed to

provide support to growth during FY13 was the poor

performance in the agriculture sector which shows

that Indias agriculture sector still remains dependent

on the vagaries of the monsoon. While it cant be

denied that the government has not focused on

improving the supply chain in the agriculture sector,

more still needs to be done. In lieu of the sustained

deterioration in the growth and waning business

sentiment the government had finally initiated several

reform measures since September 2012, to boost

the business sentiment, consolidate its finances and

improve the investment environment after a long

period of policy stasis. However, much needs to

be done on various fronts. The pace of reforms

that has been started should continue uninhibited

and needs to be effectively implemented so that it

translates into tangible investment decisions. Most

importantly, India needs to focus on measures

which would improve its productivity and enhance

its business competitiveness.


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A quick glance into the year gone by

GDP at factor cost constant prices E: estimated

Source :CSO

During FY13, GDP fell to a decadal low, with the

services sector witnessing a substantial moderation.

The slowdown reflects the uncertain global macro-

economic environment as well as domestic factors.

Source :CSO E: estimated

While the industrial sector continued to languish

amidst high input prices and interest rates, lackluster

investment, regulatory bottlenecks and slowdown

in demand, services sector moderated significantly

to 6.7% from the near double digit growth levels

witnessed during the earlier years.

Source: CSO

IIP continued to remain volatile registering a decline

for 6 months during the period Apr-Feb FY13.

Capital goods continued to remain in the negative

zone throughout the current fiscal year (Apr - Feb

FY13) except during the month of Oct -12 due to

festival related demand.

Source: CSO

The sustained poor output in the mining sector and

dismal performance in the manufacturing sector had

led to the deterioration in the industrial production

as given by IIP. The mining sector continues to be in

the negative zone since Jun-11 barring three months

(Jul-11, Feb-12 and Sept-12).


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Source: CSO

Consumption demand weakened considerably

during the year with the consumer durables posting

a negative growth for the three successive months

of Dec-12, Jan-13 and Feb-13. Data on car sales for

the month of Feb-13 shows that passenger car sales

have declined by 25.7% (y-o-y), the lowest since

Oct-01.

Source : CMIE

The number of projects stalled/shelved or abandoned

had increased considerably since Sept 2011quarter reflecting the weak investment scenario.

Projects got stuck owing to delay in approvals and

clearances, cost overruns, low credit disbursement

and slowdown in the overall economy.

Source : Ministry of Commerce & Industry

Apart from the coal and refinery products which

witnessed a higher growth during Apr-Feb FY13

as compared to the previous year, production

in all other segments remain subdued. Policy

uncertainties in areas such as iron ore and coal

mining have adversely affected the output of the

steel and power industries.

Source : Ministry of Commerce and Industry

WPI Inflation has come below 6.0% for the first

time after a gap of about 39 months. Weak domestic

demand and lower global commodity prices

contributed to the moderation of headline inflation.


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Softening of global commodity prices and lower

pricing power of corporates domestically has led

to slowing down of the non-food manufactured

products inflation. Non-food manufactured products

inflation, continued to ebb since September 2012,

enabled by softening prices of metals, textiles and

rubber products. Inflation in manufactured items

moderated to 4.5% in Feb-13.


Food inflation remains high as price pressures,

continued to remain significant for cereals and

pulses due to the impact of the delayed and skewed

south-west monsoon. Inflation in protein-rich food

items also remains elevated.

Source : RBI

The RBI decided to cut the policy repo rate in

January 2013 by 25 basis points and again in March

2013 by 25 basis points as overall growth decelerated

strongly. As part of the liquidity enhancement

measures CRR was reduced in three trances by a

total of 75 basis points and statutory liquidity ratio

(SLR) was reduced by 100 basis points. The RBI also

conducted open market operations and infused

liquidity through daily liquidity adjustment facility

(LAF)

Source : RBI

Due to lower deposit mobilisation, credit deposit

ratio have risen to a record high and hovered above

78.0% for the fortnight ending 8-March-13. Risk

aversion by banks, low mobilisation of deposits,

and subdued demand has led to low credit growth.

Low growth in deposits resulted as investors parked

their funds into other high yielding asset classes like

gold and real estate.


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Source : RBI

Data on sectoral deployment of credit reveals

that while credit growth had moderated across all

sectors, credit disbursement to the industry fell at

a sharper pace. Credit growth to industry (Micro

& Small, Medium and Large) stood at 14.7% as on

February 22, 2013 as compared to 19.1% as on

February 24, 2012 and 26.5% as on February 25,

2011. Moderation in credit growth to the services

was particularly evident from December 2012.

Source : CSO

Overall demand conditions in the economy

remained weak during FY13. Private consumption

expenditure decelerated primarily owing to high

inflationary pressures.

Key deficit indicators widen (as a % of GDP)

Revenue Deficit(RD)

Fiscal deficit(FD)

RD as %of FD

FY05 2.4 3.9 62.3

FY06 2.5 4 63

FY07 1.9 3.3 56.3

FY08 1.1 2.5 41.4

FY09 4.5 6 75.2

FY10 5.2 6.5 81

FY11 3.2 4.8 67.5

FY12 4.4 5.7 76.4

FY13 (RE) 3.9 5.2 75.1

RE=Revised estimates

Source: Ministry of Finance

Fiscal deficit for FY13 at 5.2% has been marginally

higher than the budgeted estimate of 5.1%.

Following the recommendations of the Kelkar

Committee, the government had unveiled a

revised fiscal consolidation roadmap. To address

fiscal imbalances, the government has partially

deregulated the prices of diesel. Besides, the annualsupply of subsidised LPG cylinders per household

has been increased to nine.

Source : RBI

Although the 10 year G-sec yield moderated from the

previous year, it still remains elevated above 8.0%.

The 10-year G-sec yield declined from 8.63% at

end-March 2012 to 7.99% on January 1, 2013

and further to 7.88% as on January 24, 2013. No


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additional market borrowing, policy rate cut,resumption of OMO purchases by the Reserve Bank

led to easing of the 10-year G-sec yields towards

the end of the fiscal year.


Indias exports declined by 1.8% (y-o-y) during FY13

to US$ 300.6 bn while imports moderated by 0.4%

to US$ 491.5 bn leading to a trade deficit of around

US$ 191 bn. Weak external demand combined with

continuing high imports of POL and gold, resulted

in deterioration of the trade balance. Slow down indeveloped economies coupled with lower growth

in Asian economies has weighed on Indias external

demand.

Source : RBI

The CAD to GDP ratio stood at 6.7% during Q3

FY13 widening from 5.4% during Q2 FY13 driven

mainly by larger trade deficit. With the surge in

capital inflows, CAD during the quarter could be

fully financed. The pickup in capital flows was mainlydue to foreign portfolio investment which rose to

US$ 8.6 billion during Q3 of 2012-13 from US$ 1.8

billion in Q3 of previous year. While, FDI declined to

half to US$ 2.5 billion during Q3 FY13 from US$ 5

billion during the same period last year.

During April-December 2012, CAD accounted for

5.4% of GDP as against 4.1% of GDP in the same

period of 2011.

Source : RBI

At end-Dec 2012, the ratio of short term debt to

external debt stood at 24.4%, the highest since

March 1991, reflecting the vulnerability of Indias

external payment situation. The ratio of short-term

debt to foreign exchange reserves stood at 31.1%

at end-December 2012, as compared to 26.6% at

end-March 2012

Source : RBI


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Indias foreign exchange reserves have beenmoderating since the last two years. Indias foreign

exchange reserves provided a cover of 78.6% to the

total external debt stock at end- December 2012 (as

compared to 85.2% at end-March 2012 and 99.7%

at end-March 2011).

Source : BSE Sensex

The BSE Sensex and S&P CNX Nifty crossed the

20,000 and 6,000 mark, respectively after two years.

The BSE Sensex closed at 20,026.61 on January 23,

2013. Hike in diesel price, cap on subsidised LPG,permission for FDI in retail and aviation and the

passing of the Banking Laws (Amendment) Bill, 2011

in Parliament, along with hopes of a cut in the policy

rate by the Reserve Bank and sustained FII inflows

helped revive the domestic equity market.


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Economy Outlook FY14

Real GDP to grow by 6.5% during

FY14

Source: CSO and D&B India E: D&B estimates F: D&B forecast

Although Indias growth is expected to revive

during FY14 from the decadal low witnessed during

FY13, the pace of recovery is expected to be

quite sluggish as the outcome of the reforms andmeasures taken by the government to boost the

investment sentiment and the economic growth will

take some time to materialize. Moreover, revival in

the industrial activity will require the government

to continue with its reform measures. The easing

of monetary policy by the RBI since January 2013

will also aid in the restoration of the investment

and hence the industrial activity. We expect the

slowdown in the global economic activity to stabilize

and waning of uncertainty among the corporate andthe consumers and fiscal consolidation undertaken

by the government to provide support to the

economic growth. Assuming a normal monsoon,

D&B expects the GDP to record an average growth

of 6.5% during FY14.


Disaggregating GDP data on a sectoral basis, the

recovery in growth is expected to be driven by

the services and the industrial sector. While the

agriculture sector is expected to register a higher

growth of 3.4% during FY14 as compared to an

estimated 1.9% during FY13, its share in overall

growth is expected to be lower during FY14 as

compared to the previous year.

The services sector which would occupy the largest

share in overall growth is expected to remain

resilient during FY14 as compared to the substantial

moderation recorded during FY13. Expected

improvement in domestic market conditions

and some stability in the global economic activity

coupled with easing credit conditions are likely to

help the service sector to grow by 7.9% during FY14

from an estimated 6.7% during FY13. The services

sector will still remain elusive of the near double

digit growth rates enjoyed during FY06 to FY11 as

the domestic industrial sector as well as the global

economy is likely to take some more time to revive

completely and grow strongly.

The industry segment - comprising of manufacturing,

construction, mining and electricity which was


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impacted by the regulatory bottlenecks, highinterest rates and input costs is expected to register

a moderate growth of 4.8% during FY14 from an

estimated 3.1% during FY13. The ailing industrial

sector is likely to get a boost primarily from the

easing monetary policy and the governments thrust

to stimulate the investment sentiment and the

overall investment scenario.

Private consumption demand likely

to be higher in FY14


Moderation in private final consumption expenditure

(PFCE) during FY13 turned out to be much more

intense than estimated by D&B at the beginning of

the year. During first three quarters of FY13, PFCE

registered a growth of 2.9% (y-o-y) as against a

growth of 7.4% (y-o-y) in the same period previous

fiscal. Inflationary pressures, moderation in income,

elevated interest rates and weak consumer

sentiments had dragged down the consumptionactivities in FY13. D&B expects PFCE to register

a moderate growth of 4.0% in FY13 as against a

growth of 8.0% during FY12 and to recover and

grow at around 6.4% in FY14. The recovery in PFCE

will be driven by the following factors:

Likely moderation in inflation would increase

purchasing power of the households and might

stimulate consumption.

Moderation in interest rates will improvethe retail credit availability, in turn boosting

consumption.

IncreaseinallocationinsocialsectorintheUnion

Budget FY14 is likely to drive the consumption in

rural areas.

Thrust in infrastructure investment will also

help to boost demand

Discretionary spending will lead the overall

growth in PFCE in FY14.

Industrial activity to witness

moderate improvement


IIP growth during FY13 continued to remain plagued

by regulatory bottlenecks limiting investment, supply

and infrastructure bottlenecks, high input prices

and lack of demand - both domestic and external.

D&B expects IIP to grow and revive to some extent

during FY14 as compared to an estimated dismalgrowth of 1.2% during FY13. D&B expects IIP to

grow by 3.7% during FY14 on account of:

Furthereasingofmonetarypolicy

Thrust given by the government to promote

industrial growth

Revivalininvestmentactivitytosomeextent

Moderation inWPI inflation to ease the input

cost and drive demand

Gradualimprovementinthebusinesssentiment


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Savings rate to improve marginally


The saving propensity of the domestic economy

has been severely impacted by the persistently high

inflationary pressure, relatively slower adjustment

of bank deposit rates, volatility in the Indian equity

market and lower profitability and weak balance

sheet of the corporate. D&B forecasts Indias savings

rate to improve marginally to 30.3% during FY14

from the estimated low of 29.2% during FY13.

Factors that would aid the increase in savings rate

are:

Governmentsinitiativestoboostthesavingsof

the household sector

Easingofinflationarypressures

Lowerfiscaldeficit

Revivalindomesticsentiment

Investment rate to improvemarginally


Deferment of planned projects and increase in

the number of stalled projects due to delay in the

approval process for projects, regulatory hurdles,

cost increases eroding profitability and impending

new investment prospects have severely impacted

the investment rate during FY13. D&B expects

investment rate to improve marginally to 35.1% inFY14 from an estimated 34.9% in FY13.

Increase in investment rate is expected to be

supported by the following factors:

Improvingbusinessoptimism

Continuedeasingofmonetarypolicytosupport

investment climate

Fiscal consolidation and series of measures

announced by the government to facilitate

investment activity Continued thrust on infrastructure

development


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Bank credit

Source: RBI and D&B India F: D&B forecast

Risk aversion by banks due to rising NPA levels along

with high interest rates impacting credit demand

have dented the credit growth during FY13. D&B

expects the credit growth to improve from the low

rates of 14.7% in FY13 to 17.0% in FY14 due to the

following factors:

Further easing of the policy repo rate during

FY14

Improving liquidity conditions would supportcredit disbursement by banks

Higher credit demand as economic activity

gathers momentum

Interest rates

Interest rates are expected to moderate during

FY14 as the RBI has already started lowering down

the policy rate. Inflation has started moderating with

the core inflation trending along the RBIs comfort

zone and growth has decelerated sharply which

will provide RBI the headroom for further easing its

monetary policy.

The still high fiscal deficit and consequent increase

in market borrowing by the government is likely to

keep the G-sec yield elevated during FY14. D&B

expects the 10-year G-sec yield to be around 7.7%

by end of FY14 as compared to previous close of

8.04% during FY13. The yields of the T-bills are

likely to remain lower during FY14 as comparedto FY13 as credit and liquidity conditions gradually

improve.

Inflationary pressures

Source: Ministry of Commerce & Industry, D&B India

F: D&B forecast

D&B expects the WPI inflation to moderate

considerably and average at around 5.7% during FY14

from 7.4% during FY13. Slowing down of economy

and excess capacity in some sectors is expected to

aid in cooling down of inflation. Pass through of fuel

price adjustments is likely to provide some upward

pressure to overall inflation. However, declining

international commodity prices, including global

crude oil is likely to aid in moderation in inflation.

Further, easing of some supply side constraint and

fiscal consolidation by the government is likely to

help in subsiding inflationary pressures.

Rupee to witness some appreciation

D&B expects rupee to appreciate significantly during

FY14. Rupee is expected to gain in the second half

of FY14 and be around ` 52.50 per US$ at end FY14

registering a 3.5% appreciation in its value. Surge in

foreign capital inflow will drive the appreciation in

the rupee value. Moreover, fall in prices of gold and

global crude oil prices is likely to support rupee.


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Fiscal deficit to remain highThe slowing down of the economy constraining

generation of tax revenue, as well as the collection

of non-tax revenue, had led to breaching of the

fiscal deficit target. D&B expects the fiscal deficit

to be at 5.1% during FY14, slightly lower than 5.2%

achieved during FY13 but higher than the level of

4.8% budgeted by the government. Though the

government might be able to cap the subsidy bill to

some extent given the deregulation of the diesel,

LPG and petrol, and constrain its expenditure,the targeted increase in revenue realisation might

not materialize to the extent budgeted by the

government.

External Sector to improve

Source: Ministry of Commerce & Industry, D&B India

F: D&B forecast

Diversification of exports market and products will

hold the key to growth in exports during FY14. In

the recent foreign trade policy the total number ofcountries under focus market scheme and special

focus market scheme has been increased, whereas

126 new products have been added under focusproduct scheme. Changes in SEZ policy and IT/

ITES parks along with zero duty export promotion

capital goods (EPCG) scheme will also help in

promoting exports in the forthcoming fiscal year.

Macro economic factors like increase in investment,

moderation in inflation and recovery in global

economic scenario will have a positive impact on

Indias export. D&B estimates exports to touch

US$ 328 bn in FY14, a growth of around 9% after

declining by 1.8% in FY13.

In FY13, imports witnessed significant moderation

and grew by around 0.4% due to inadequate

demand, lack of investment and subdued consumer

sentiments. The demand conditions are likely to

improve in FY14 with moderation in inflation and

revival of investment activities in the second half of

FY14. The global commodity prices are witnessing

a downward trend for the last few months and it

is expected to continue further. Therefore, D&B

expects imports to be around US$ 547 bn with

growth of 11.3% over previous year and this in turn

will lead to a trade deficit of US$ 219 bn in FY14

as compared to US$ 191 bn in FY13. D&B further

expects that the surge in service exports will ease

the current account deficit. The current account

deficit would moderate to 4.8% of the GDP during

FY14 as compared to 5.7% estimated for FY13.


17/2115

Special Article

Indias fiscal situation has turned precarious and has

become a hurdle in the path of higher growth. Large

fiscal deficit has vitiated the overall macroeconomic

environment via multiple channels. The persistence

of large fiscal deficits has added further upward

pressures on interest rates, thereby impeding

investment, particularly private investment. The

worsening of fiscal situation has also contributed tothe fall in Government savings. Finally, higher fiscal

deficits have also led to an increase in government

borrowing and high debt servicing. Given the

adverse impact that high deficit poses on Indias

growth prospects, it has become vital to outline a

clear roadmap to reduce fiscal deficit.

The Government has started undertaking

substantial fiscal consolidation to enable public

finances on a sounder footing. These include partialderegulation of administered fuel prices, particularly

diesel, launching of a direct cash transfer scheme to

enhance efficiency of subsidies, transfers and social

welfare payments, capping the number of subsidized

gas cylinders and tighter curbs on spending. The

Budget has reiterated its commitment towards fiscal

consolidation. The Budget 2013-14 has estimated a

fiscal deficit target of 4.8% of GDP for FY14, lower

than the deficit of 5.2% in FY13. The government is

relying on higher revenue growth to meet the fiscaldeficit target for FY14. The revenue receipts are

estimated to expand by 21.2% in FY14, reflecting a

19% and 33% rise in net tax and non- tax revenues,

respectively. Expenditure has been budgeted at

` 16,652.97 bn, a 16.4% increase as compared to the

revised estimates (RE) of FY13. Non plan revenue

expenditure is expected to rise by a modest 8% in

FY14, lower than the 13.3% growth in FY13 (RE).

Fiscal Consolidation: Need of the Hour

The question that arises is, would the measures of

fiscal consolidation proposed in the budget stimulate

investment and growth. Looking back at the history

of fiscal imbalance, the best years of fiscal prudence

was achieved during the period between FY05 -

FY08.

Source: RBI, Union Budget 2013-14

The improvement in Central Government finances

was the outcome of a confluence of factors; the

period was marked by high economic growth and

the resultant increase in tax revenue as well as

major tax administration and tax structure reforms

at the central level. The tax-GDP ratio improved and

reached a peak of 11.9% in FY08. Total expenditure

as a proportion of GDP was brought down from

15.4% in FY05 to 13.6% in FY07. Subsidy as a

percentage of GDP remained more or less stagnant

during the high growth phase. Fiscal consolidation

in the high growth phase was primarily achieved

through higher revenue growth. However, the

current scenario is that of declining GDP growth and

bleak investment activity, thereby raising fears that

the fiscal targets would be breached substantially.


18/2116

Concerns arise on whether the government

would be able to generate the requisite revenue

to finance the total expenditure laid out in the

budget. If revenue generation falters owing to

failure of revival of economic growth or due to

difficulties in implementing the revenue generating

measures, either fiscal consolidation will have to be

foregone or expenditure will need to be curtailed.

Achieving the fiscal deficit target is further reliant on

containing the subsidy bill at`

2.3 trillion in FY14.Subsidy expenditure is budgeted to decrease by

10.3% in FY14 relative to FY13 RE. This target looks

very optimistic and would primarily depend on the

petroleum subsidy bill (budgeted to decline by 33%

in FY14 relative to FY13 RE).

Source: RBI

BE- Budget Estimates

A major issue at the present juncture is to makecredible progress towards fiscal consolidation.

Even as achieving these targets assumes priority,

the path of fiscal adjustment is equally important as

the target. While, a lot would depend upon a host

of macroeconomic factors, implementation of key

reforms such as GST can push growth and expand

the tax base and contribute significantly to higher

revenues. Focus on expenditure-related reforms

also holds the key to this path. The Government

needs to focus on measures to contain growth ofrevenue expenditure and commit more resources

towards capital expenditure. This would help ease

some structural bottlenecks that contribute to

supply-side inflationary pressures.


19/2117

Some Concerns to Growth

Indias economy is at an edge, with growth trending

below the potential level and economic fundamentals

remain weak and structural problems persist

because of lack of adequate economic reforms since

2004. Although we expect Indias GDP growth to

recover during FY14, at a much slower pace, the

process of recovery might get derailed as there

are several risks which poses downside risks to therevival in the economic growth.

Euro zone remains mired in recession, with

Cyprus being the new country to be embroiled in

the debt crisis. Prolonged non-resolution of the

debt crisis in the Euro region and deferral in the

recovery process of the US economy coupled

with slowing down of the emerging countries

would impede India growth momentum

Ifmonsoonturnsouttobebelownormal,not

only agricultural growth would be impacted, the

resultant increase in food prices would lead to

higher WPI inflation.

Any shocks tooil prices could stroke upward

pressure to headline inflation and deteriorate

current account deficit.

Continuation of the reform measures is

important and lack of proper implementation of

the reforms could be a drag to the revival in the

industrial growth.

Non revival in corporate investment and

infrastructure building and further decline in

FDI inflows could be a major hindrance to theresumption in the industrial activity.

Continuationofthefiscalconsolidationinitiated

by the government will be a major boost to the

overall growth, failure of which might hinder

recovery in private investment demand

Political uncertainty owing to the outcome of

the election process could disrupt the reform

process


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Variables 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 (E) 2013-14 (F)

Real Sector

Nominal GDP (` Bn) 49871 56301 64778 77953 89749 100833 113135

Nominal GDP Growth (YOY%) 16.1 12.9 15.1 20.3 15.1 12.4 12.2

Real GDP (` Bn) 38966 41587 45161 49370 52436 55058 58636

Real GDP Growth (YOY%) 9.3 6.7 8.6 9.3 6.2 5.0 6.5

Population (Mn) 1138 1154 1170 1186 1202 1217 1232

GDP Per Capita ` 34241 36037 38599 41627 43624 45240 47587

Agriculture ( Bn) 6551 6557 6610 7135 7395 7535 7792

Agriculture Growth (YOY%) 5.8 0.1 0.8 7.9 3.6 1.9 3.4

Industry (` Bn) 11200 11697 12769 13939 14425 14872 15586

Industry Growth (YOY%) 9.7 4.4 9.2 9.2 3.5 3.1 4.8

Services (` Bn) 21216 23333 25782 28297 30616 32667 35248

Services Growth (YOY%) 10.3 10.0 10.5 9.8 8.2 6.7 7.9

Sectoral Share (%)

Agriculture 16.8 15.8 14.6 14.5 14.1 13.7 13.3

Industry 28.7 28.1 28.3 28.2 27.5 27.0 26.6

Services 54.4 56.1 57.1 57.3 58.4 59.3 60.1

IIP (YOY%) 15.5 2.5 5.3 8.2 2.9 1.2 3.7

Private Fixed Consumption

Expenditure (PFCE) Constant (YOY%)9.4 7.2 7.4 8.6 8.0 4.0 6.4

Savings Rate % to GDP 36.8 32.0 33.7 34.0 30.8 29.2 30.3

Investment Rate % to GDP 38.1 34.3 36.5 36.8 35.0 34.9 35.1

Inflation Rate (Average %)

WPI- All Comm 4.7 8.1 3.8 9.6 8.9 7.4* 5.7

WPI-Manuf 4.8 6.2 2.2 5.7 7.3 5.4* 5.0

CPI-IW 6.2 9.1 12.4 10.4 8.4 9.9 8.2

Monetary (End Period)

15-91 days' Treasury Bill (yield) 7.00 4.55 3.93 7.14 8.94 8.08* 7.50

10 Year G-Sec (yield) 7.64 7.04 7.83 8.02 8.45 8.04* 7.70

M3 (Growth Rate %) 21.4 19.3 16.9 16.1 13.2 13.3* 15.5

Bank Credit (Growth Rate %) 22.3 17.5 16.9 21.5 17.0 14.7* 17.0

External Sector

Exchange Rate (USD/INR) (End Period) 39.99 50.95 45.14 44.65 51.16 54.39* 52.50

Exchange Rate (USD/INR) (Average) 40.24 45.92 47.42 45.58 47.92 54.45* 53.37

Exports (US $ Bn) 162.9 185.3 178.8 251.1 306.0 300.6* 328.0

Exports (Y-O-Y Growth) 28.9 13.7 -3.5 40.5 21.8 -1.8* 9.1

Imports (US $ Bn) 251.4 303.7 288.4 369.8 489.3 491.5* 547.0

Imports (Y-O-Y Growth) 35.4 20.8 -5.0 28.2 32.3 0.4* 11.3

Trade Balance (US $ Bn) -88.5 -118.4 -109.6 -118.6 -183.4 -190.9* -219.1

Current Account Balance % of GDP -1.3 -2.3 -2.8 -2.7 -4.2 -5.7 -4.8

Public Finance

Fiscal Deficit 2.5 6.0 6.5 4.8 5.7 5.2 5.1

D&B's Key Macroeconomic Forecast

Note: E - D&B Estimates; F - D&B Forecast

* are the acutal numbers


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