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Near Term Future of the Indian Economy

Analysis of Macroeconomic Parameters

Group 3

BANKING ASSIGNMENT

Overview of Indian Economy

The economy of India is the tenth-largest in the world by nominal GDP and the third-largest by purchasin [1] power parity(PPP). The country is one of the G-20 major economies and a member of BRICS. On a percapita-income basis, India ranked 141st by nominal GDP and 130th by GDP (PPP) in 2012, according to [14] the IMF. India is the 19th-largest exporter and the10th-largest importer in the world. The economy [15] slowed to around 5.0% for the 201213 fiscal year compared with 6.2% in the previous fiscal. On 28 August 2013 the Indian rupee hit an all time low of 68.80 against the US dollar. In order to control the fall in rupee, the government introduced capital controls on outward investment by both corporates and [16] individuals. India's GDP grew by 9.3% in 201011; thus, the growth rate has nearly halved in just three years. GDP growth rose marginally to 4.8% during the quarter through March 2013, from about 4.7% in the previous quarter. The government has forecast a growth rate of 6.1%-6.7% for the year 201314, whilst the RBI expects the same to be at 5.7%. Besides this, India suffered a very high fiscal deficit of US$ 88 billion (4.8% of GDP) in the year 201213. The Indian Government aims to cut the fiscal deficit to [citation needed] US$ 70 billion or 3.7% of GDP by 201314. The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining features of capitalism and socialism, resulting in an inward-looking, interventionist policies and import[17] substituting economy that failed to take advantage of the post-war expansion of trade. This model contributed to widespread inefficiencies and corruption, and the failings of this system were due largely to [17] its poor implementation. In 1991, India adopted liberal and free-market principles and liberalised its economy to international trade under the guidance of Former Finance minister Manmohan Singh under the Prime Ministry of P.V. Narasimha Rao, prime minister from 1991 to 1996, who had eliminated Licence Raj, a pre- and postBritish era mechanism of strict government controls on setting up new industry. Following these major economic reforms, and a strong focus on developing national infrastructure such as the Golden Quadrilateral project by former Prime Minister Atal Bihari Vajpayee, the country's economic growth [18] progressed at a rapid pace, with relatively large increases in per-capita incomes.

Inflation Prediction
Inflation likely to stay above comfort levels in 2013-14 and remain range-bound around current levels Average headline inflation declined from 9.6 per cent in 2010-11 to 8.9 per cent in 2011-12 and further to 7.3 per cent in 2012-13, with a low of 6.0 per cent in March 2013. As a baseline case, it is expected to see some further moderation in H1 of 2013-14 on the back of subdued pricing power of domestic producers and falling global commodity prices before it increases somewhat in H2 due to base effects and a reduction in the output gap. On the whole, inflation during 2013-14 is likely to remain range-bound around current levels, but stay above the Reserve Banks comfort level. significant suppressed inflation lingers in the system, despite the considerable pass-through that occurred during 2012-13. The proposed diesel price pass-through and the likely increase in electricity tariffs and coal prices, would exert some upward pressure on prices. An increase in coal prices would be necessitated, factoring in coal imports that would be needed to bridge the demand-supply gap. An increase in power tariffs is expected along the lines envisaged as part of the restructuring package for the distribution companies. Sticking to the envisaged path of diesel price hikes is necessary to create fiscal space for increasing public investments and for lowering the fiscal risks to macro-financial stability. As a baseline case, the outlook on global energy prices is benign. Supplies are expected to improve, in part by the exploitation of shale gas reserves in the US. Along with soft metal prices, it could contribute significantly to keeping the imported inflation component low during 2013-14, though its ultimate transmission would depend on the extent of correction in the CAD and the consequent rupee exchange rate movements.

By March 2013, WPI inflation at 6.0 per cent turned out to be lower than the Reserve Banks indicative projection of 6.8 per cent, mainly due to a sharp deceleration in non-food manufactured products inflation

in the second half of the year. The global inflation outlook for the current year appears more benign compared to last year on expectations of some softening of crude oil and food prices. Accordingly, imported inflation is likely to be lower provided the exchange rate remains broadly stable. Indicators of corporate performance, industrial outlook and PMIs are pointing to a declining pricing power. On the other hand, food inflation is likely to be a source of upside pressure because of persisting supply imbalances. Also, the timing and magnitude of administered price revisions, particularly of electricity and coal, will impact the evolution of the trajectory of inflation in 2013-14. Keeping in view the domestic demand-supply balance, the outlook for global commodity prices and the forecast of a normal monsoon, WPI inflation is expected to be range-bound around 5.5 per cent during 2013-14, with some edging down in the first half on account of past policy actions, although there could be some increase in the second half, largely reflecting base effects

Fiscal Deficit
Fiscal deficit to remain high at 5.5 per cent of GDP in 2013-14 .It is expected fiscal deficit to settle at around 5.5 per cent of the GDP during 2013-14, compared to its forecast of 5.8 per cent for 2012-13. The decline in fiscal burden is based on the assumption that the government would continue to make efforts towards fiscal consolidation. The governments revenue growth is expected to see some improvement in 2013-14, due to higher GDP growth. The Union Budget, to be presented in February, will provide some clarity on the implementation of the goods and services tax which could augur positively for tax collection. Revenues generated via disinvestment and spectrum sale is largely expected to remain at par with levels seen in the current fiscal. As of December 2012, the total amount raised by means of the 2-G spectrum reallocation was only Rs 94 billion against a targeted Rs 400 billion and the revenue generation via disinvestment was around Rs 70 billion, as against a targeted Rs 300 billion. On the expenditure side, the subsidy burden is expected to ease slightly, due to lowering of international crude oil prices and further pass through of these prices to domestic consumers. Our fiscal deficit forecast assumes an average crude oil (Europe Brent) price of US$100 per barrel in 2013-14 and an 8-10 per cent pass-through in domestic fuel prices. While the subsidy burden of the government will remain below 2.0 percent of the GDP (in our fiscal projections), pre-election welfare spending is likely to keep the fiscal deficit high.

GDP Forecast
India to grow at 6.7 per cent in 2013-14 Uncertain global economic prospects do not bode well for Indias exports and will limit external stimulus to its economy. Indias growth prospects in 2013-14 will, therefore, be largely shaped by domestic factors. An improvement in private consumption growth would be critical to revive GDP growth in 201314. Higher agriculture income - driven by normal monsoons, pre-election welfare spending by the government and lower interest rates will be key drivers of private consumption in 2013-14. Improvement in growth, driven by higher consumption growth will therefore come from higher capacity utilisation rather than capacity creation. This will help the economy inch closer to its potential growth rate of 7.0 per cent (the Reserve Bank of Indias estimate) and narrow the output gap in 2013-14. We do not expect a strong upturn in investment growth in 2013-14 since the investment pipeline has been impaired. New project pipeline will be created in 2013-14 if the private investment climate turns favourable and consumption growth picks up as forecast. Passage of policy reforms such as Land Acquisition Bill and National Investment Board as well as resolution of mining related issues will lead to higher investments and strengthen the growth momentum in the following fiscal (2014-15). Overall, Indias GDP growth should pick-up to 6.7 per cent in 2013-14, from 5.5 per cent projected for 2012-13. Normal monsoons will boost agricultural GDP growth to an above trend rate of 3.5 per cent in 2013-14, also gaining from a lower base in 2012-13. Further, this will have a positive spillover effect on growth in the industry and services sectors. Monsoons (June-September rains) are critical for agricultural growth in India, given that over 50 per cent of the cultivated area is non-irrigated. CRISIL Research forecasts that delayed and non-uniform monsoons in 2012 will lower growth in agricultural GDP growth to 0.6 per cent in 2012-13, compared to an annual trend rate of around 3 per cent. In 2012-13, the industrial sector has been plagued by a slowdown both in investment and consumption - driven by a policy logjam. The industry has been particularly hit by disruptions to mining output for most part of the current fiscal. The manufacturing sector has been adversely impacted by declining private consumption, corporate investment as well as export demand. In 2013-14, however, we foresee a revival in industrial growth to 5.4 per cent from 3.2 per cent, in the first half of 2012-13, due to growth in private consumption and modest recovery in exports. However, despite this recovery, the projected industrial growth will still remain below its 20-year average of 6.9 per cent and 10-year average of 7.9 per cent.

Conclusion
Recently, HSBC cut its growth forecast for India for the current fiscal year, which ends March 31, to 5.2 percent, from a previous forecast of 5.7 percent. On Tuesday, Fitch Ratings restated a negative outlook on Indias sovereign credit rating, warning that a possible downgrade could come in the next 12 to 24 months. The uncertainty seems to stem from the sheer number of problems the country is grappling with, and the ruling Congress Party governments inability to grapple effectively with inflation, the fiscal deficit, slowing growth and a weak balance of payments. Just a few years ago, India was considered one of the worlds fast-growing new economic powerhouses, and there were strong expectations that the economy could grow 10 percent a year. But in October, the International Monetary Fund cut its prediction for real economic growth in India in 2012 to 4.9 percent, the lowest in a decade. Recently, HSBC said that a structural slowdown in the economy was the reason behind a lowered growth forecast. The bank also cut expectations for the next fiscal year from 6.9 percent to 6.2 percent. Looking ahead, we expect non-agricultural GDP growth to move more or less sideways in the near term, and only recover very gradually thereafter as key structural reforms are slowly rolled out, the report said.

Fitch said that a combination of widening fiscal deficits, slowing growth and persistently high inflation put the countrys sovereign credit rating at risk. Our key concerns revolve around the fiscal situation in the country and any material decline in Indias potential growth rate, Art Woo, director of Asia Sovereign Ratings at Fitch Ratings, said in a telephone interview. If there is an acceleration in reforms, that would improve Indias fiscal condition and would be cause for a positive outlook on ratings, he said, although these moves might prove politically unpalatable and difficult to carry out. Indias current account deficit, a measure of the difference between the value of exports and imports, hit a record high of 5.4 percent of the gross domestic product (GDP) in the July-September quarter, according to data released by the Reserve Bank of India in December. While Finance Minister P. Chidambaram announced measures in October to cap the fiscal deficit for this financial year at 5.3 percent of GDP, some analysts are skeptical. In my opinion India will most likely miss its fiscal deficit target of 5.3 percent of gross domestic production which has already overshot a previous target of 5.1 percent, Mr. Woo said. Under pressure to spur the economy, the Indian government has introduceda series of economic reforms since mid-September, including raising the price of fertilizer and diesel, further opening the retail sector to foreign investment, and allowing foreign investment in the insurance, pensions and aviation sectors. Not surprisingly, Indias finance ministry remains confident about the countrys economic future. We are not worried. We have been saying we are on right track, Arvind Mayaram, Secretary at the Department of Economic Affairs at the Finance Ministry, said in an interview with the Press Trust of India on Tuesday, after the Fitch assessment became public. Fitch views these measures as a step in the right direction, but no guarantee for improved economic performance. While opening up foreign direct investment and other measures taken by the government in the insurance, pension and aviation sectors are a positive development, there is still much uncertainty, Mr. Woo said. Analysts from HSBC said the reforms will take some time to show marked results. They predict it will be another three years before growth returns to 8 percent on a sustained basis. Others remain cautiously optimistic about Indias economic future.

The Fitch ratings outlook is more backward-looking than forward looking, said Sujan Hajra, chief economist and executive director of institutional equity at Anand Rathi Financial Services. In our opinion economic growth, inflation and the fiscal situation have all bottomed out and will show a gradual improvement in the coming two quarters, he said. Why? There have been significant reform measures undertaken and these will begin to show results soon, Mr. Hajra said. Reform measures taken by the government since September 2012 are a good start, said Vaibhav Agrawal, vice president of research banking at Angel Broking. They have been taking actions consistent with their announced intentions so its not all talk, he said. In November, Moodys said that its outlook for India was stable and it maintained a Baa3 rating, which is described as a medium-grade rating with moderate credit risk. The ratings agency cited Indias high saving and investment rates, relatively competitive private sector and diverse economy as rationale behind its decision. However, the report said, The rating is constrained by the credit challenges posed by Indias poor social and physical infrastructure, low per capita income, high government deficit and debt ratios, a complex regulatory environment, and a tendency towards inflation. Analysts and rating agencies are both looking ahead with some trepidation at the fiscal 2013 2014 budget, which will be announced before the end of March. Because it is the last budget to be announced by the current government before the 2014 general election, many fear that the central government will resort to populist but costly measures, threatening the countrys fiscal and economic health. The government has to take some tough decisions in the coming budget on politically sensitive issues such as oil prices, said Nimish Shah, managing director at Fortune Financial Services. The need of the hour is a largely reformist budget that reigns in expenditure.