Strong reforms must to pull economy out of morass: India Ratings

Indian Ratings has kept its FY15 growth forecast unchanged at 5.6 per cent.

By: Press Trust of India | Mumbai | Published: April 28, 2014 8:00:15 pm

The economy is ‘delicately’ balanced and to return to a higher growth trajectory, it needs strong policy reforms, according to India Ratings. The agency has kept its FY15 growth forecast unchanged at 5.6 per cent.

The agency also rules out any drastic drop in farm productivity saying the reservoirs are a decadal high already and it is too early to assess the impact of possible El Nino.

“The economy, at this point of time, is delicately balanced and requires a serious policy push to return on the high growth path,” India Ratings said in a report today.

According to the report, although the worst appears to be over, it is unlikely that the economy will migrate to a high growth phase of around 9 per cent over next 2 to 3 years.

Finance secretary Arvind Mayaram over the weekend had said the economy is likely to grow at 5.5 per cent in the current fiscal.

On the likelihood of an El Nino incident, the report said it is too early to assess the impact of the phenomenon on agriculture.

“Adequate water storage in major reservoirs, 25 per cent higher than last year and 37 per cent higher than the average of last 10 years, as of April 3, 2014, will cushion the adverse impact of a rainfall shortage, if any,” it said.

This will also help in alleviating some pressures which are likely to emanate from the lower-than-average seasonal rainfall, at 95 per cent of long period average.

Last week, the India Meteorological Department (IMD) had said the monsoon was expected to be below normal because of the El-Nino effect. The seasonal rainfall is likely to be 95 per cent of the long period average with an error of plus or minus 5 per cent, it said.

The rating agency expects seasonal factors, mainly rainfall, to continue to exert pressure on inflation.

However, it expects both the WPI and the CPI based inflations to fall and average out at 5.5 per cent and 8 per cent, respectively, in FY15.

India Ratings rules out the possibility of sharp monetary easing by the Reserve Bank in FY15.

In its base rate scenario, the agency expects a 25 basis points cut in policy rates, that too in second half of the current fiscal.

The report estimates current account deficit (CAD) to be USD 45.4 billion (2.1 per cent of GDP) in FY15. It was USD 32 billion or 1.7 per cent last fiscal.

“Capital flows are expected to be buoyant and are estimated to touch USD 60 billion (mainly through direct and portfolio investment) in FY15,” the report said.

The agency believes a manageable CAD and rise in foreign currency assets will support the rupee, which is expected to settle at around 57-58 by end of this fiscal. It said a mild decline in inflation and the rupee appreciation will impact interest rate positively.

It expects 10-year G-sec rate to settle around 8.3-8.4 per cent by end-March 2015.

The report further said the mining sector, though still in red, is recovering and is likely to reverse its trend of contraction since FY12 in FY15.

“We don’t expect a quantum jump in iron ore mining in FY15 due to depressed domestic as well as export demand,” it said.

It expects the industrial sector to grow by 4.1 per cent 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, it added.

However, the report does not see sharp revival in manufacturing sector in the short-run due to low demand.





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