Thursday, July 10, 2014

Macroeconomic performance of Indian economy in FY2014

This blog post discusses FY2014 macroeconomic performance of the Indian economy. For macroeconomic update on Nepalese economy, see this and this.

Real sector (growth rate of real GDP, factor cost 2004-05 prices): The Indian government has projected the economy to grow by4.7% in FY2014 (ends 31 March 2014), marginally higher than 4.5% in FY2013 and reflecting the hard reforms needed to weed out the structural constraints constraining particularly agricultural and industrial sector. This below 5% growth rate for successive two years is the first time in the last 25 years. Agriculture sector growth of 4.7% is mostly due to the favorable monsoon rains, which increased agriculture production.

Industrial sector remains the vital to the recovery of the Indian economy as it: (i) accounts for 24.3% of total employment; (ii) it contributes about 21.4% and 45.1% of total inputs requirement in agriculture and services sector; and (iii) it accounts for 59.6% of total inputs employed in the economy. Rejuvenating growth in manufacturing is vital as it remains the core of intra and inter sectoral backward and forward linkages.

In expectation of a better manufacturing performance, the government is forecasting FY2015 GDP growth between 5.4% and 5.9% in FY2015 (expectation that growth will remain on the lower side).

Fiscal sector: Gross fiscal deficit is forecast at 4.5% of GDP, slightly down from 4.9% of GDP in FY2013. Revenue deficit is forecast at 1.2% of GDP and primary deficit at 1.2% of GDP in FY2014. The fiscal consolidation is largely a result of reduction in public expenditure. Further fiscal consolidation is required especially on two fronts: (i) raising tax-GDP ratio; and (ii) rationalization of subsidy regime.

Monetary sector: The Indian government is expecting inflation to moderate somewhat in FY2014, but it states that this rate is still above the comfort zone. Average headline WPI and CPI (IW) are forecast at 6.0% and 9.7% respectively (marginally down from 7.4% and 10.4%, respectively in FY2013), thanks to elevated food price pressures. There was a general credit slowdown with commercial bank credit growth of 13.9%, lower than a rate of 14.1% in FY2013.

In FY2015, inflationary pressures could come from two fronts: (i) lower agriculture production due to sub-normal monsoon; and (ii) higher prices of oil as a result of volatile geo-political situation in the Middle East.

External sector: As a share of GDP, current account balance is forecast at 1.7% deficit, substantially down from a deficit of 4.7% of GDP in FY2013. The average exchange rate stood at IRs 60.5 = $1, a depreciation from IRs 54.41 = $1 in FY2013. Foreign exchange reserves stood at $304.2 billion. As the rupee weakened, export recovered by registering 4.1% growth rate, much higher than a negative 1.8% growth in FY2013. Meanwhile, import decreased by 8.3% in FY2014, attributed to the measures taken by the government and RBI to discourage import of non-essential items, particularly gold.