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EAC upgrades outlook for services growth, lowers industrial growth

EAC upgrades outlook for services growth, lowers industrial growth

Does the report of the economic advisory council (EAC) to the Prime Minister have any clues for the markets? Well, EAC says portfolio inflows (including inflows to the debt markets) will see a small growth during the current quarter. Here’s the quote in full: “From December 2010 onwards, FII inflows have been very subdued and negative on the equity side. The council believes that this trend may correct in the last two months of the fiscal year and have accordingly projected a small growth in portfolio flows (including investment in debt instruments) for the last quarter of 2010-11."

Current trends for 2011 show that we have indeed had a small inflow of around $1.2 billion (Rs5,400 crore today), but the break-up of that is $2.7 billion of inflows into the debt markets and $1.5 billion worth of outflows in equities. So the “small growth" may not refer to equity flows at all. Interestingly, EAC believes portfolio inflows will be much lower in FY12. Its forecast for FY12 is of $25 billion, compared with $38.8 billion estimated for FY11. Total portfolio flows (equity plus debt) were $32.3 billion in FY10.

While EAC has kept GDP growth rate for FY12 at 9%—the same rate predicted in its July report—the composition of that growth is very different. For instance, in July, growth in industry was forecast at 10.3% for FY12, while services were supposed to grow 9.6%. In its recent report, the forecast for industrial growth is 9.2% and for services it’s 10.3%. Since most listed firms in the stock market are part of the industrial sector, the outlook for the market has, therefore, been revised downwards, in spite of overall GDP growth remaining same.

Consider also the rate of growth in gross fixed capital in the private corporate sector. After growing by 17% in FY10, growth in this sector has decelerated to 12.5% this fiscal, as seen in the slowdown in order books of engineering firms. Next fiscal, EAC feels gross fixed capital formation growth in private sector will be higher at 15%. However, overall growth in fixed capital formation is forecast to rise from 8.4% in FY11 to 13.7% in FY12. That’s a far bigger jump than the rise in gross fixed capital formation in the private corporate sector alone, which implies higher investment demand by the government. Whether that indeed happens is something the budget will show. That said, the fact that EAC has kept FY12 growth at 9% is a positive, as is the lower current account deficit forecast and higher levels of foreign direct investment, a sizable chunk of which will be BP’s stake in Reliance’s gas fields.

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