GDP to grow faster, rupee to gain, crude and current account deficit to fall – Crisil

CRISIL Research has predicted a GDP growth rate of 6.7 percent in the coming financial year, compared to its estimate of 5.5 percent in the current year, based on more stable global economic trends, crude price at $100 per barrel and normal monsoon.

The rupee will rise to 51-52 per dollar in the next 14-15 months, Crisil added.

It, however, warned that investment activity is unlikely to pick up strongly in the new year as “the investment pipeline has been impaired.”

“Higher agriculture income – driven by normal monsoons, pre-election welfare spending by the government and lower interest rates will be key drivers of private consumption in 2013-14. Improvement in growth, driven by higher consumption growth will therefore come from higher capacity utilisation rather than capacity creation.

“This will help the economy inch closer to its potential growth rate of 7.0 per cent (the Reserve Bank of India’s estimate) and narrow the output gap in 2013-14… New project pipeline will be created in 2013-14 if the private investment climate turns favourable and consumption growth picks up as forecast.,” Crisil Research said.

Over 50 percent of the cultivated area is non-irrigated. Agriculture contributes about 14% of India’s economy. Normal monsoons will have a positive spillover effect on growth in the industry and services sectors, the agency said.

The erratic monsoon this year is likely to result in a more or less flat agricultural growth (0.6%) compared to the historical average of 3% every year.

Industrial growth was also hit in the current year due to declining private consumption, corporate investment as well as export demand. Exports account for nearly a third of India’s GDP.

“In 2013-14, however, we foresee a revival in industrial growth to 5.4 per cent from 3.2 per cent, in the first half of 2012-13, due to growth in private consumption and modest recovery in exports,” Crisil said. The 10-year average industrial growth for India is 7.9%.

Service sector, which accounts for more than half of the GDP will continue to grow at 8 percent in the new year, it said.

“Pre-election welfare spending by the government, lower interest rates, moderation in inflation and higher farm incomes (assuming normal monsoons) will boost household spending and thereby, benefit sectors such as consumer durables, automobiles, media and entertainment, community and social services, and financial services. Higher external demand, as a result of marginal recovery of global growth, could also raise India’s exports, especially IT/ITeS,” it said.

Wholesale price inflation will dip slightly to 7% in the new year from 7.7% estimated for the current one as the declining growth catches up with demand, it added.

The prediction is based on an easing of global crude price to $100 per barrel due to higher shale gas production in the US, expected removal of sanctions imposed on Iran and significant capacity additions in Iraq. It was at $109.3 per barrel in April-December 2012-13.

India’s current account deficit is forecast to be at 3.2 per cent of GDP in 2013-14. CAD had hit 5.4% in the second quarter of this year. Capital flows will be enough to meet the current account deficit, but they are also subject to how the global economy performs, Crisil pointed out.

Higher FDI limits in several sectors, clarifications with regards to GAAR norms, and higher GDP growth in India should boost the inflow of dollars, it said. External debt repayments, which largely comprise external commercial borrowings, are projected to fall by almost 30 per cent in 2013-14 to US$ 20 billion, it added.

Gold, which accounts for about 11% of India’s imports, continued to grow on a year on year basis, and is unlikely to see much decline in demand. “Recent data from the World Gold Council suggests that demand for gold has recovered,” it said, noting that volumes rose 9% despite extremely high prices in the December quarter.

Fiscal deficit to settle at around 5.5 per cent of the GDP during 2013-14, compared to the estimated 5.8 per cent for 2012-13.