India Economy Outlook for 2013-14: 5 key takeaways

The Economic Advisory Council to the PM recently released the document on the ‘Economic Outlook for 2013-14’, essentially for the remaining 2^nd half of the current financial year. Some of India’s near term challenges include slowing growth, fiscal deficit concerns and moderation in capital flows. The report does, however point out to positives as well – like softening in inflation pressures and potential curbing of the current account deficit.

So here are the five takeaways:

#1. Growth remains weak: It is a great agricultural season, but that alone does not robust growth make. The PMEAC expects GDP to grow by a recessionary 5.3% yoy. This is expected to be largely on account of slowing down in services activity – the growth is expected to come off to 6.6% from 7.1% - which is over half of the Indian economy.

#2. Fiscal challenge: The report points out to the fact that in the first 4 months of 2013-14 itself, the fiscal deficit reached 63% of budget estimates. With slowing growth and government revenues, a 4.9% fiscal deficit to GDP ratio could be hard to reach.

#3. Slowing net capital inflows: Net capital inflows during 2013-14 are expected to US $ 61 billion, down from US $ 89 billion during 2012-13. While this is a significant decline, some the reasons for it can be found in the fact that in 2012-13 we saw the second highest flows ever. In terms of the components, the decline is expected largely due to weak FII flows, even as FDI flows improve from the previous year and slowing down in external commercial borrowings.

#4. Inflation to soften: Headline inflation numbers (WPI) have already shown softening during the first half of 2013-14, and the PMEAC expects that with a good agricultural season too, there should be continued moderating impact on inflation. WPI is expected to be at 5.5% at the end of the financial year.

#5. Come off in current account deficit: The CAD has been a serious source of concern in the recent past, but the PMEAC is optimistic about it. It estimates that not only will CAD decline in proportion of GDP – to 3.8% of GDP from 4.8% during the previous year, but actually decline in absolute terms as well to US $ 70 bn from US $ 88 bn during the previous year.

In balance, the outlook is realistic about soft growth prospects, given the recent trends and its implications for the fisc, but the external sector is looking somewhat more comfortable in the second half of the year even with slowing capital flows and so is the remaining part of the year for inflation.