Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Economic Outlook (PMEAC)
PM EAC Report: Emphasizes on reforms to achieve 9% stable growth. The
Council downgraded its FY2012E growth projection to 8.2% from 9% as the erosion in
investor sentiment and the persistence of inflationary pressures were affecting
investment demand. The report points to the challenges in sticking to the agreed fiscal
consolidation path, by both the Centre and States, and stresses on the need to
undertake key reforms in this area. Headline WPI is projected to moderate to 6.5% by
March 2012, lower than RBI’s target of 7%. Importantly, the report emphasized on the
need to improve the investment rate to achieve a sustainable 9% growth.
FY2012E growth target likely to be capped at 8.2%
The FY2012E growth target was lowered to 8.2% from 9% estimated in February 2011. The
downward revision reflects the negative impact of high interest rates on manufacturing and
construction. Additionally, operational constraints and policy hurdles are expected to keep mining
sector output lower (Exhibit 1). Interestingly, the Council thinks it is “unlikely” that growth would
exceed its revised target, in sharp contrast to the previous occasions when the Council has been
confident of its growth projections. This change possibly reflects an implicit acknowledgement by
the Council that there are downside risks to growth should the government dither on key reforms.
In our opinion, even the revised growth target is optimistic as we expect sticky inflation, high
interest rates and weak investment demand to result in FY2012E GDP growth closer to 7.3%.
Headline inflation to ease to 6.5% by end-FY2012E
The Council expects headline inflation to remain at 9% or above until October and thereafter
moderate to 6.5% by March 2012. This is lower than the RBI’s end-year projection of 7%. While
firm global commodity prices, possibility of further upward adjustment in domestic administered
fuel prices could keep inflation sticky in the near term, past RBI rate hikes is expected to see
inflation moderate in 2HFY12E. We expect headline inflation to ease to 6.5-7% by end-FY2012E
Fiscal consolidation a challenge (not just in FY2012E) in the absence of reforms
The Council expects that the Centre and State governments could struggle to adhere to their
budgeted fiscal consolidation paths this year. This is in sharp contrast to the PM’s office that is
confident of achieving the fiscal targets for the year. For the Centre, slippage on the expenditure
side is likely owing to greater outgo on the fuel and fertilizer subsides, while custom and excise tax
collections would be lower owing to the recent duty cuts and excise cuts. Importantly, the report
points out that the medium term fiscal challenges are even greater, given the government’s
commitment to introduce universal education to secondary level, universalize healthcare and food
security. Thus, there is an urgent need to introduce reforms to augment government revenues in
the form of the DTC, GST etc. For the State governments, deterioration in the finances of State
Electricity Boards poses a significant risk to their 2.1% GFD/GDP target and once again reforms in
this area are critical to lower State government liabilities. We are also of the view, that there are
several challenges to the budget estimates and expect GFD/GDP to be closer to 5.5% in FY2012E.
Investments key to returning to high growth path
The report emphasizes on the need to provide conditions conducive for investments which is a
pre-condition to achieve and sustain a 9% growth trend. GFCF/GDP has dropped from 32.9% in
FY2008 to 29.5% in FY2011, and as per the report, a 2-3% decline in the rate of capital
formation could have 75-100 bps impact on the economic growth. The Council stressed on the
need to provide clarity on policy, remove uncertainties both on the policy and administrative fronts
and undertake key reforms as some of the key ingredients to improve the investment climate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Economic Outlook (PMEAC)
PM EAC Report: Emphasizes on reforms to achieve 9% stable growth. The
Council downgraded its FY2012E growth projection to 8.2% from 9% as the erosion in
investor sentiment and the persistence of inflationary pressures were affecting
investment demand. The report points to the challenges in sticking to the agreed fiscal
consolidation path, by both the Centre and States, and stresses on the need to
undertake key reforms in this area. Headline WPI is projected to moderate to 6.5% by
March 2012, lower than RBI’s target of 7%. Importantly, the report emphasized on the
need to improve the investment rate to achieve a sustainable 9% growth.
FY2012E growth target likely to be capped at 8.2%
The FY2012E growth target was lowered to 8.2% from 9% estimated in February 2011. The
downward revision reflects the negative impact of high interest rates on manufacturing and
construction. Additionally, operational constraints and policy hurdles are expected to keep mining
sector output lower (Exhibit 1). Interestingly, the Council thinks it is “unlikely” that growth would
exceed its revised target, in sharp contrast to the previous occasions when the Council has been
confident of its growth projections. This change possibly reflects an implicit acknowledgement by
the Council that there are downside risks to growth should the government dither on key reforms.
In our opinion, even the revised growth target is optimistic as we expect sticky inflation, high
interest rates and weak investment demand to result in FY2012E GDP growth closer to 7.3%.
Headline inflation to ease to 6.5% by end-FY2012E
The Council expects headline inflation to remain at 9% or above until October and thereafter
moderate to 6.5% by March 2012. This is lower than the RBI’s end-year projection of 7%. While
firm global commodity prices, possibility of further upward adjustment in domestic administered
fuel prices could keep inflation sticky in the near term, past RBI rate hikes is expected to see
inflation moderate in 2HFY12E. We expect headline inflation to ease to 6.5-7% by end-FY2012E
Fiscal consolidation a challenge (not just in FY2012E) in the absence of reforms
The Council expects that the Centre and State governments could struggle to adhere to their
budgeted fiscal consolidation paths this year. This is in sharp contrast to the PM’s office that is
confident of achieving the fiscal targets for the year. For the Centre, slippage on the expenditure
side is likely owing to greater outgo on the fuel and fertilizer subsides, while custom and excise tax
collections would be lower owing to the recent duty cuts and excise cuts. Importantly, the report
points out that the medium term fiscal challenges are even greater, given the government’s
commitment to introduce universal education to secondary level, universalize healthcare and food
security. Thus, there is an urgent need to introduce reforms to augment government revenues in
the form of the DTC, GST etc. For the State governments, deterioration in the finances of State
Electricity Boards poses a significant risk to their 2.1% GFD/GDP target and once again reforms in
this area are critical to lower State government liabilities. We are also of the view, that there are
several challenges to the budget estimates and expect GFD/GDP to be closer to 5.5% in FY2012E.
Investments key to returning to high growth path
The report emphasizes on the need to provide conditions conducive for investments which is a
pre-condition to achieve and sustain a 9% growth trend. GFCF/GDP has dropped from 32.9% in
FY2008 to 29.5% in FY2011, and as per the report, a 2-3% decline in the rate of capital
formation could have 75-100 bps impact on the economic growth. The Council stressed on the
need to provide clarity on policy, remove uncertainties both on the policy and administrative fronts
and undertake key reforms as some of the key ingredients to improve the investment climate.
No comments:
Post a Comment