5.3% FY14 GDP forecast is bit optimistic: Experts

Prime minister's economic advisory council (PMEAC) today slashed growth forecast for FY14 to 5.3 percent from 6.5 percent announced in the Budget. PMEAC Chairman C Rangarajan said that containing fiscal deficit will be a challenge and added that RBI has to stick with tight monetary stance till rupee stabilises.

Dr Rangarajan is talking about 3 percent manufacturing growth, but evidence doesn’t suggest that, UR Bhat, MD, Dalton Capital Advisors said. Aditi Nayar,Senior Economist, ICRA said that the rating agency foresees 4.9-5.1 percent growth for the current year, so the 5.3 percent growth projection is a bit optimistic. Positive July IIP just a one-off! Like most market experts, Bhat is also of the view that there are pitfalls in the July IIP data and one cannot extrapolate it. After two consecutive months of contraction, the industrial production data for July has seen a growth of 2.6 percent which was primarily led by manufacturing, capital goods and electricity. Gold imports have reduced, but the upcoming festive season may put a cap on that compression. As far as exports are concerned, there was an element of a one time impact on account of sharp rupee depreciation, which may not be sustainable, he explained. “This GDP number is debatable. There is a lot of mileage that we need to cover and that is much more than extrapolation,” he added. Agreeing with Bhat, Nayar added that one should not attach too much importance to surprising July IIP data. A very volatile component within the IIP has led to positive growth, so the sustainability of capital goods data is a bit doubtful. Without that, the IIP data would have been very mild, she said.  Key concerns We are looking at a situation where revenues will fall short of Government of India’s budget estimates and particularly fuel subsidies will overshoot with the extra amount that has already been penciled in for last year, says  Nayar. If there is compression of capital expenditure from government departments in the second half of the year then that could wash away a lot of positive impact that is expected from agriculture, rural demand and exports. “We are looking at a slightly lower number very close to last year despite the positive impact of agriculture and exports,” she said. ICRA expect the current account deficit for FY to stand at USD 75 billion. According o Nayar, the government should allow some resumption in gold imports as the festive and wedding season is nearing. Market still on shaky grounds The market is unlikely to sustain above the psychological level of 6,000 on the back of July IIP and August inflation data, says UR Bhat. He pointed that this data includes a lot of one time element, so the market will take some time to interpret this data. According to him, the 15 percent run-up seen in the Nifty from 5,100 to its current levels is due to inflows of nearly a billion dollar. He cautions that FII inflows, which have been quite aggressive as of now, may not continue to be so once US Fed begins tapering. There is a possibility that domestic political uncertainty and global events may again push the market into a situation where there are sporadic periods of FII outflows, which can be quite destabilizing for the overall market sentiment, Nayar added. No rate cut till Q4? The FOMC meeting scheduled on September 18 would be a key deciding factor about how the monetary policy outlook would be for the rest of the year, says Nayar. She further cautions that in the near term, overshooting of the rupee still remains a major risk factor. At best, the central bank is likely to maintain a status quo in September and in Q3 as far as rate cut is concerned. However, there could be a likelihood of mild rate cuts in the fourth quarter to get growth back. All eyes are set on the upcoming RBI monetary policy to be held on September 20.