India Macro View
Revising Our GDP Estimate to 5.4%YoY; External Imbalances
Take a Toll
We Revise Our FY14 GDP Estimate Down to 5.4%YoY from 5.7% — For as long as
monetary policy is geared towards managing external risks while putting domestic
growth inflation dynamics on the sidelines, the economic recovery is likely to remain
tentative at best. Since risks on the external front are far from over – the RBI macro
review report aptly sums it up as “overall situation remains in flux”- we reassess our
growth estimate in light of following developments:
– Focus of Monetary Policy Has Shifted towards Managing External Risks- A
sharp and swift depreciation in INR on fears of Fed tapering led to RBI hiking MSF
rates by 200bps on 15 July. Subsequently, in its quarterly policy, RBI adjusted the
stance of monetary policy to assign highest priority to management of external risks.
This shift in policy stance (see RBI Policy), albeit time-bound, imposes additional
costs for the real economy through tightening of the credit channel.
– Investment Demand Remains Lackluster – Several factors, such as structural
bottlenecks in the core sector, slowing consumption, weak export demand, and
policy uncertainty have kept investment demand in the slow lane. The sluggish
investment activity can be seen in recent project data with new project
announcements down by 18%QoQ in 1QFY14 (see Report). While the government
continues to take steps to address supply-side concerns, a revival in investments
rests on effective implementation, which is a challenge in the run-up to the general
elections.
However, Some Bright Spots Have Also Emerged —
– Southwest Monsoon and Improved Agricultural Outlook – The monsoon season
has been progressing extremely well this year with rainfall higher by 16%YoY and a
corresponding increase in sowing areas by 18%YoY for the kharif season so far.
With kharif crops contributing close to half of total grain production, we have
upgraded our estimate of agriculture output. Robust agriculture production is also
expected to support a pick-up in rural consumption demand.
– Core Inflation has Moderated; Could Provide Space for Monetary Easing – The
headline WPI has averaged at 4.8% in 1QFY14 vs 7.4% last year. Core WPI
inflation is down to a 42 month low of 2.1%. Improved kharif outlook and a lower
hike in minimum support prices augurs well on price front going forward. Slowing
inflation is likely to provide necessary space for the monetary policy to stimulate the
economy once normalcy returns on the external front.
On balance, we estimate GDP at factor cost to grow at 5.4% - Agriculture growth is
now estimated at 4.8%, industry at 2.3% and the services sector at 7%
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Revising Our GDP Estimate to 5.4%YoY; External Imbalances
Take a Toll
We Revise Our FY14 GDP Estimate Down to 5.4%YoY from 5.7% — For as long as
monetary policy is geared towards managing external risks while putting domestic
growth inflation dynamics on the sidelines, the economic recovery is likely to remain
tentative at best. Since risks on the external front are far from over – the RBI macro
review report aptly sums it up as “overall situation remains in flux”- we reassess our
growth estimate in light of following developments:
– Focus of Monetary Policy Has Shifted towards Managing External Risks- A
sharp and swift depreciation in INR on fears of Fed tapering led to RBI hiking MSF
rates by 200bps on 15 July. Subsequently, in its quarterly policy, RBI adjusted the
stance of monetary policy to assign highest priority to management of external risks.
This shift in policy stance (see RBI Policy), albeit time-bound, imposes additional
costs for the real economy through tightening of the credit channel.
– Investment Demand Remains Lackluster – Several factors, such as structural
bottlenecks in the core sector, slowing consumption, weak export demand, and
policy uncertainty have kept investment demand in the slow lane. The sluggish
investment activity can be seen in recent project data with new project
announcements down by 18%QoQ in 1QFY14 (see Report). While the government
continues to take steps to address supply-side concerns, a revival in investments
rests on effective implementation, which is a challenge in the run-up to the general
elections.
However, Some Bright Spots Have Also Emerged —
– Southwest Monsoon and Improved Agricultural Outlook – The monsoon season
has been progressing extremely well this year with rainfall higher by 16%YoY and a
corresponding increase in sowing areas by 18%YoY for the kharif season so far.
With kharif crops contributing close to half of total grain production, we have
upgraded our estimate of agriculture output. Robust agriculture production is also
expected to support a pick-up in rural consumption demand.
– Core Inflation has Moderated; Could Provide Space for Monetary Easing – The
headline WPI has averaged at 4.8% in 1QFY14 vs 7.4% last year. Core WPI
inflation is down to a 42 month low of 2.1%. Improved kharif outlook and a lower
hike in minimum support prices augurs well on price front going forward. Slowing
inflation is likely to provide necessary space for the monetary policy to stimulate the
economy once normalcy returns on the external front.
On balance, we estimate GDP at factor cost to grow at 5.4% - Agriculture growth is
now estimated at 4.8%, industry at 2.3% and the services sector at 7%
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