India’s GDP projected to grow at 5.3% in 2013-14

India's gross domestic product (GDP) is expected to grow at a higher average annual rate of 5.3 per cent in the current financial year (2013-14) against the revised estimates of 5.0 per cent GDP growth in 2012-13, as per the projections in the `Economic Outlook' report for the 2013-14 financial year.

The Indian economy had grown at a faster pace of 6.2 per cent in the previous fiscal, ie, 2011-12.

The report, prepared by the prime minister's economic advisory council, headed by former Reserve Bank of India governor C Rangarajan, has projected a per capita GDP growth of 4.8 per cent in 2013-14, against the annual per capita GDP growth of 3.7 per cent (revised) and the 4.0 per cent growth estimated for the previous financial year.

According to the document, released at a press conference in New Delhi today, India's GDP (at factor cost at constant 2004-05 prices) will grow at 5.3 per cent in 2013-14.

With timely and early rains during the current monsoon season, both kharif and rabi crops are expected to be good. Agricultural production is projected to grow at 4.8 per cent in 2013-14 against the slow 1.9 per cent growth recorded in 2012-13.

Industrial production, which includes manufacturing, mining and quarrying, electricity, gas, water supply and construction etc, is projected to grow at 2.7 per cent in 2013-14 against the 2.1 per cent growth recorded in 2012-13.

Manufacturing output is projected to grow at 1.5 per cent in 2013-14 against 1 per cent in 2012-13.

Services projected to grow at 6.6 per cent in 2013-14 as against 7.1 per cent in 2012-13.

The council expects economic growth rate in 2013-14 to be higher than it was in 2012-13 due mainly to the substantially improved performance of agriculture.

The other sectors of the economy are also expected to perform better during the second half of 2013-14, as the full impact of various measures taken over the last six months will be reflected later in the year.

The strong emphasis laid on improving the performance of key infrastructure sectors that lie in the public domain such as coal, power, roads and railways and the continuous efforts to remove bottlenecks in the implementation of projects are also expected to influence growth in the fiscal second half, the council pointed out.

Structural deficiencies
The report sees some structural deficiencies like  a decline in domestic savings rate of 6 per cent between 2007-08 and 2011-12 almost entirely on account of a decline of 3.7 per cent in public sector savings and a 2.2 per cent drop in private corporate savings.

Net financial savings of households declined to 8 per cent in 2011-12 from 11-12 per cent in years prior to 2010-11, the report pointed out.

Investment rate is projected at a low 34.7 per cent of GDP in 2013-14 against the estimated 35 per cent in 2012-13.

Domestic savings rate is projected at 31 per cent of GDP as against the estimated 30.2 per cent of GDP in 2012-13.

During 2013-14 the good performance in agriculture will have a moderating effect on food inflation although the depreciation of the rupee may put some upward pressure. On balance, the wholesale price index-based inflation rate is expected to be around 5.5 per cent by end-March 2014 against the average of 7.4 per cent in 2012-13 and 5.7 per cent at end-March 2013.

However, the report sees a widening rift between the WPI-based inflation estimates and the consumer price index-based inflation rate on account of higher weightage of food items in CPI.

External deficit
With a current account deficit projected at $70 billion (3.8 per cent of the country's GDP) in 2013-14, against an estimated $88.2 billion (4.8 per cent of GDP) in 2012-13, controlling current account deficit remains the man concern at present.

Merchandise trade deficit of the country is projected at $185 billion (10.1 per cent of GDP) in 2013-14 against an estimated $195.7 billion (10.6 per cent of GDP) in 2012-13.

Net invisibles earnings of the country, which include exchange rate fluctuations, are projected at $115 billion (6.3 per cent of GDP) in 2013-14 against an estimated $107.5 billion (5.8 per cent of GDP) in 2012-13.

Between 2010-11 and 2012-13, the combined impact of higher net oil and net gold imports on the CAD was almost $57 billion or 3.0 per cent of GDP. This was equivalent to 87 per cent of the aggregate deterioration in the merchandise trade balance of $65 billion during the period, the council said in its report.

With exports improving and a slight dip in imports, the country's current account deficit in 20131-14 is could even fall below $70 billion in 2013-14 if the recent trends in exports and imports are maintained, the report noted.

Net capital flows are projected at $ 61.4 billion (3.4 per cent of GDP) in 2013-14, against an estimated $89.4 billion in 2012-13, the second highest level to date.

Net FDI inflows in 2013-14 are projected at $21.7 billion, against an estimated $19.8 billion in 2012-13.

The report projects higher net FII inflows of $2.7 billion in 2013-14, even though data up to end of August shows a negative outflow. FII inflows during the 2011-12 and 2012-13 financial years are estimated at $17 billion and $27 billion, respectively.

Total inflows under the head of loans (ECBs and short-term loans) are projected at $22 billion in 2013-14 against an estimated $31.1 billion in 2012-13.

Total banking capital inflows are projected at $ 18 billion in 2013-14 against an estimated $ 16.6 billion in 2012-13.

Rupee depreciation
The rupee has depreciated by over 20 per cent in the current financial year that began in April 2013 amidst a general decline in the values of emerging market currencies. Currencies of those economies, including India, with large current account deficits, high inflation and weakening growth have depreciated the most.

For India, the short-term problem is of financing the large CAD, while the medium term issue is to compress CAD to a more sustainable level of around 2.5 per cent of GDP and ensure price stability, the report stated.

The rupee has now started showing some stability and market volatility has decreased with increase in capital inflows and some gains on the export front. As capital flows return and as CAD begins to fall, the rupee will strengthen further.

Fiscal deficit
Containing the budgeted fiscal deficit of the central government, which is estimated at 4.8 per cent of GDP in 2013-14, against an estimated 4.9 per cent in 2012-13, could still pose a challenge

The fiscal deficit during the first four months of the current financial year has already reached 62.8 per cent of the budgeted level and expenditure on major subsidies stood at 51.3 per cent of the budgetary provision for the full financial year.

The discretionary expenditure budget may have to be compressed, and subsidies restructured, in the remaining months of the financial year in a growth friendly manner to limit fiscal slippages.

The fiscal deficit of all states put together was 2.8 per cent of GDP in 2009-10, and moderated further to 2.1 per cent in 2012-13 (BE). A slow but steady growth of tax and non-tax receipts, as well as central transfers have helped in the process of fiscal consolidation in the states.

Monetary policy
The current stance of monetary policy has to continue until stability in the rupee is achieved. Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authorities can switch to a policy of easing. The time frame for this is very difficult to specify, the report pointed out.

The `Economic Outlook 2013-14 has suggested certain growth-friendly measures, taken last year, including liberalisation of FDI investment norms, resolution of some tax issues of concern to industry, fast-tracking of public sector investment with focused attention on coal, power, road, railways, initiating construction on the dedicated freight corridor, fast-tracking/debottlenecking of some 209 key projects( with an aggregate investment of Rs384,203 crore), mid-course corrective measures to contain fiscal deficit, improved investment policy regime across a number of sectors like sugar, urea, gas, roads, banking, etc and an accelerated parliamentary approval of pending bills, over the short term.

Over the medium to long-term, the report suggested measures like improving domestic supply chains, addressing specific tax issues in sectors like electronics, facilitating productivity shift through assured supply of skilled labour, encourage ease of doing business by streamlining procedures, improving manufacturing capabilities, boosting foreign investment through stable, non-reversible policies, early resolution of transfer pricing issues, reducing CAD through a focussed strategy to improve export competitiveness in the light of the depreciating rupee.

Besides the report has recommended simplifying export related procedures, boosting domestic coal production and reducing oil subsidies to make them more price elastic, pro-active implementation of modified gold deposit scheme, etc for improving CAD.