Economy delicately balanced: India Ratings

Although the worst appears to be over, it is unlikely that the Indian economy will migrate to a high growth phase of around 9% over the next two-to-three years.

The agency believes the economy, at this point of time, is delicately balanced and requires a serious policy push to return on the high growth path.

While the El Nino phenomenon is developing, Ind-Ra believes it is too early to assess its impact on Indian agriculture. Adequate water storage in major reservoirs, 25% higher than last year and 37% higher than the average of the last 10 years (as on 3 April 2014), will cushion the adverse impact of a rainfall shortage, if any.

Ind-Ra believes this will alleviate some of the pressure likely to emanate from the lower-than-average seasonal rainfall, at 95% of long period average. Also, the agricultural output depends more on the spread of rainfall over space and time than the average quantum.

The mining sector, though still in red, is recovering and is likely to reverse its trend of contraction since FY12 in FY15.  Also, the Supreme Court has lifted the ban on iron ore mining in Karnataka and Goa.

However, Ind-Ra does not expect a quantum jump in iron ore mining in FY15 due to depressed domestic as well as export demand. Ind-Ra expects the industrial sector to grow by 4.1% in FY15 mainly due to better mining and electricity sector performance.

The uptick in industrial activities in FY15 will also emanate from election-related expenditure, excise duty cuts for the auto sector, project clearances by the Cabinet Committee on Investment and construction activities in Delhi Mumbai Industrial Corridor and Dedicated Freight Corridor.

Even though the manufacturing sector will contribute to industrial growth, Ind-Ra does not see sharp sector revival in the short-run due to the low demand.  

The agency expects seasonal factors (mainly rainfall) to continue to exert pressure on inflation. However, it expects both the wholesale price index (WPI) and the consumer price index (CPI) based inflations to fall and average out at 5.5% and 8.0%, respectively, in FY15.

The stance of monetary policy would be decided by the trajectory of retail inflation and the fiscal policy of new government. Ind-Ra rules out the possibility of sharp monetary easing by the Reserve Bank of India in FY15. In its base case scenario, it expects a 25bp cut in policy rates, that too in 2HFY15.

The World Trade Organisation’s global trade growth forecast of 4.7% in 2014 (2013: 2.1%) is welcome news for Indian exports. Ind-Ra estimates current account deficit (CAD) to be USD45.4bn (2.1% of GDP) in FY15.

Capital flows are expected to be buoyant and are estimated to touch USD60bn (mainly through direct and portfolio investment) in FY15. As a result, around USD15bn accretions are expected to the foreign currency assets. 

Ind-Ra believes a manageable CAD and rise in foreign currency assets will support the rupee, which is expected to settle at around 57-58/USD by FYE15 (59.92/USD at FYE14).

A mild decline in inflation and rupee appreciation will impact interest rate positively. Ind-Ra expects 10-year G-sec rate to settle around 8.3%-8.4% by FYE15 (FYE14: 8.8%).