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Aug 24, 2012, 01.45 PM IST
ICRA has come out with its release on GDP for 2012-13. The research firm expects the pace of growth of real GDP at factor cost eased to 5.1% in Q1FY13 from 5.3% in Q4FY12.
ICRA has come out with its release on GDP for 2012-13. The research firm expects the pace of growth of real GDP at factor cost eased to 5.1% in Q1FY13 from 5.3% in Q4FY12. While the weak momentum of the industrial sector persisted in Q1FY13, lead indicators such as cargo handled at major ports and railway revenue earning freight traffic suggest a moderation in the pace of growth of service sector activity as well.
Delays in obtaining regulatory clearances, environmental approvals and issues related to land acquisition continue to dampen investment sentiments in India, ICRA said.
Notwithstanding the recent pickup, an unfavourable progress of the south west monsoon rainfall in 2012 has emerged as a concern, with negative implications for Indian growth-inflation dynamics and the potential to exacerbate the fiscal slippage relative to Government of India’s (GoI’s) Budget Estimates for 2012-13, a report by ICRA on macro-economic conditions, said here.
While the considerable depreciation of the Rupee in 2012 may boost import substitution, exports of services and exports of non-oil, non-jewellery goods, the pace of expansion would be constrained by the sluggish outlook for global economic growth. Notwithstanding some improvement, the current account deficit is expected to remain substantial at around USD 69 billion (3.7% of GDP) in 2012-13. Accordingly, attracting adequate capital inflows to fund the anticipated large current account deficit is likely to pose a considerable challenge in 2012-13, said Ms. Aditi Nayar, Senior Economist at ICRA Ltd.
ICRA expects that the pace of growth of real GDP at factor cost eased to 5.1% in Q1FY13 from 5.3% in Q4FY12. While the weak momentum of the industrial sector persisted in Q1FY13, lead indicators such as cargo handled at major ports and railway revenue earning freight traffic suggest a moderation in the pace of growth of service sector activity as well. The healthy rabi harvest in 2012 is expected to have partly offset the negative impact of the unfavourable onset of the south west monsoon rainfall on agricultural growth in Q1FY13.
An early resolution of regulatory issues that are holding up investment in various sectors is key to easing the supply-side pressures afflicting the Indian economy. Measures to improve production of domestic coal and thereby availability of power for industry remain critical to support economic activity in the near term and to boost the potential growth rate over the longer term.
The magnitude of rainfall in the remainder of the monsoon season will influence food production, prices and consumer confidence in FY13. To some extent, automatic stabilisers such as the National Rural Employment Guarantee Scheme (NREGS) and other drought relief measures undertaken by the Government would provide income support in the rural sector in the current fiscal year. This would partly arrest the extent of moderation in private consumption growth, while at the same time contributing to fiscal slippages.
Based upon an expectation of a generalisation of inflationary pressures related to high food prices; increase in the extent of suppressed inflation related to the regulated price of diesel in recent weeks; and the likelihood of a considerable pass-through of a potential revision in diesel prices, ICRA has revised its forecast for average WPI inflation for FY13 to 7.5-7.7% from the previous estimate of 7.0-7.5%.
The improvement in fiscal balances in 2012-13 BE targeted by GoI is unlikely to materialise; underfunded subsidies and an unanticipated outgo towards drought relief and income support programmes are likely to result in an overshooting of revenue expenditure. Additionally, lower economic growth relative to GoI’s assumption of 7.6% would likely result in a shortfall in tax revenues. Depending on the timing and extent of measures to contain fuel subsidies, GoI’s fiscal deficit is expected to widen to 5.7%-6.0% of GDP in the current fiscal year, considerably inferior to the budgeted level of 5.1% of GDP. Given the anticipated fiscal slippage, GoI’s borrowings for H2FY13 may exceed the indicative amount of Rs. 2,000 billion by Rs. 600-900 billion. Containing the extent of fiscal slippage would reduce the extent of crowding out of private investment and boost investor confidence.
Ms. Nayar further added that, “At present, ICRA does not foresee a reduction in the policy rate in the mid-quarter policy review to be held by the Reserve Bank of India (RBI) in September 2012. However, a significant ebbing of monsoon-related concerns in the next fortnight; a diesel price hike; or a sharp deceleration in GDP growth in Q1FY13 may prompt the RBI to indicate a less hawkish stance in the September policy review. With inflation and fiscal slippage likely to exceed our previous expectations, ICRA anticipates that the space available for the RBI to reduce the policy rate in 2012-13 to be limited to 25-50 bps as compared to our previous estimate of 50-75 bps. We do not anticipate any change in the cash reserve ratio (CRR) or the statutory liquidity ratio (SLR) in the remainder of FY13, as long as concerns related to the sovereign debt of the Advanced Economies do not cause a major global crisis.” The senior economist with ICRA added.
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Tags: ICRA, RBI, GDP growth, NREGS, National Rural Employment Guarantee Scheme , Nayar, Reserve Bank of India
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