New Delhi: Banking on a bumper harvest, the Prime Minister’s economic advisory council (PMEAC) on Friday said the economy is set to recover from its weakest pace of growth in a decade, but cautioned that the sharp depreciation of the rupee may constrain the central bank’s options in promoting growth.
In its report on the Economic Outlook for 2013-14, the council projected that the economy will grow at 5.3% in this fiscal year, faster than the 5% growth rate in the previous fiscal year.
“The second quarter should be stronger. However, if overall economic growth for the year has to top that of the previous year, growth in the second half has to show distinct improvement. Can it? The answer is a qualified yes,” the council said in its report.
India’s Index of Industrial Production (IIP) rebounded in July, rising 2.6% after contracting 1.1% in the June quarter. Double-digit growth in merchandise exports for two consecutive months, positive cues from the equity and currency markets in the past week, and fading war clouds in Syria are seen as green shoots of recovery by some experts.
In the first quarter of the current fiscal, the Indian economy grew 4.4%, compared with 5.4% in the year-ago period. After the announcement on the first quarter gross domestic product (GDP) data, Nomura Holdings Inc. and HSBC Holdings Plc. joined other brokerage houses in cutting their 2013-14 growth projections for India to 4.2% and 4%, respectively.
High interest rates in the face of persistently high inflation caused corporate investment plans to be put on hold and hurt consumer spending, while demand for exports was weak in key markets such as the US and Europe.
C. Rangarajan, chairman of the council, said the higher growth estimate is due to expectations of healthy farm output, which is projected to grow 4.8% in 2013-14. The industry and the services sectors are estimated to grow 2.7% and 6.6%, respectively, he said, releasing the economic outlook report.
Crisil Ltd chief economist D.K. Joshi said economic growth above last year’s 5% mark looks difficult this year unless agriculture does exceptionally well by growing 6%. Joshi said the council seems to be bullish on industrial growth.
“The higher July IIP number was due to a significant jump in capital goods, which is volatile. However, export related sectors may see improvement in performance,” he said. Crisil expects economic growth this year to further slow to 4.8% from last year’s level.
On monetary policy, the report said the current stance of the Reserve Bank of India (RBI) has to continue until stability in the rupee is achieved.
“Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authorities can switch to a policy of easing. The time frame for this is very difficult to specify,” it said.
Despite the significant growth slowdown and benign core inflation—a measure that excludes volatile food and fuel prices—the depreciating rupee has prevented RBI from cutting interest rates to support growth. Since January, the rupee has weakened by 13.39%, and is the worst-performing Asian currency.
The council said that during this fiscal year, the current account deficit could be contained at $70 billion, as projected by finance minister P. Chidambaram, but cautioned that lesser net capital inflows could lead to a drawdown of reserves to the extent of nearly $9 billion.
Portfolio capital inflows, which were positive in the first two months of 2013-14, turned negative in June and continued on the same trajectory till August.
“Even if things settle down and stabilize in September portfolio flows are likely to be negative in the second quarter. With further improvement, net inflows may be expected to resume in the third and fourth quarters of the year, but any reasonable expectation can at most be modest,” the report said.
Total net portfolio capital inflows for the full fiscal year are projected at $2.7 billion, a tenth of that recorded in the previous fiscal year.
The council, however, cautioned that though the finance minister has promised not to cross the “red line” on the fiscal deficit, containing fiscal deficit at 4.8% of GDP in 2013-14 could be a challenge. Rangarajan said the government would have to reduce non-food subsidies, especially after the implementation of the food security Bill.
The council recommended that for a revival of the growth momentum, the government should contemplate an increase in income-tax exemption for investments in long-term financial assets from Rs.1 lakh currently to Rs.5 lakh. It also suggested that exports be exempted from service tax.
Rangarajan said wholesale price inflation would remain contained at 5.5% inMarch end. A good performance in agriculture will have a moderating effect on food inflation while depreciation of the rupee may increase pressure, the report said.
Retail inflation, as measured by the Consumer Price Index, slowed for the second month to 9.52% in August from 9.64% in July. Wholesale price inflation has been rising for the last two months (it rose to 5.79% in July). August data for wholesale price inflation will be released on Monday.