Millennium Post

Inflation to ease by year-end: Economic survey

As the new government battles stubbornly high food inflation and low-growth period, the pre-budget economic survey on Wednesday predicted that the headline inflation would ease by year end, providing room to the RBI to cut interest rates, and  GDP growth rate would be in the range of 5.4 to 5.9 per cent in 2014-15 overcoming the sub-5 per cent growth of past two years. ‘Headline WPI (wholesale price index) inflation is expected to moderate by the end of 2014. However, risks to the outlook stems from possible sub-normal monsoon and higher crude oil prices (on account of the crisis in Iraq),’ the Economic Survey 2013-14 tabled in Parliament by Finance Minister Arun Jaitley said.

‘The monetary management challenge will also be helped by fiscal consolidation and addressing of supply side constraints that exacerbate food inflation. All these factors, in tandem, are expected to create room for monetary easing later this fiscal year,’ it said. ‘...with the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the economy can look forward to better growth prospects in 2014-15 and beyond,’ it added.
After recovering in 2009-10 and 2010-11, GDP growth slowed down to decade’s low of 4.5 per cent in 2012-13. It picked up marginally to 4.7 per cent in 2013-14.

The survey further said the measures taken by the government to improve investment climate and improve governance could push up growth to 7-8 per cent in the coming years. However, WPI inflation rose to a five-month high of 6.01 per cent in May from 5.20 per cent in the previous month mainly driven by higher prices of food items. Talking about the challenges, the survey said, the Meteorological Department has predicted below-normal rainfall at 93 per cent of the long period average with 70 per cent probability of an El Nino occurring.

The odds of a drought are 60 per cent now, compared with 25 per cent in April, Skymet, a private forecaster said. Besides, the other most prominent risk (to price rise) is the impact on oil prices on account of the crisis in Iraq. Crude oil prices are hovering around $110 per barrel. Two-thirds of India's oil needs are met through imports. Iraq is the second-largest oil supplier after Saudi Arabia. The survey said the dramatic improvement in the external economic situation with the current account deficit declining to manageable levels and reduction in the fiscal deficit in 2013-14, along with some moderation in inflation, ‘augur well for macroeconomic stabilisation and revival of business confidence and investment.’

The external sector witnessed a turnaround after the first quarter of 2013-14 and the year ended with a current account deficit of 1.7 per cent of GDP as against 4.7 per cent in 2012-13.
Improvement is also observed on the fiscal front, with the fiscal deficit declining from 5.7 per cent of GDP in 2011-12 to 4.9 per cent in 2012-13 and 4.5 per cent in 2013-14. As regards the industry, it said, the contraction in mining and quarrying for the second year in a row in 2013-14 and the negligible growth in manufacturing over the past two years, indicate the severity of structural bottlenecks. A slowdown was also noticed in services, in particular the internal trade, transport, and storage sectors that are largely attributed to the loss of momentum in commodity-producing sectors, especially, the industry sector.

‘Thus, the revival of the industrial sector, with its economy-wide linkages, is central to the revival of aggregate economic activity,’ the survey said. With regard to the farm sector, the survey said, the agriculture and allied sectors achieved a growth of 4.7 per cent in 2013-14 compared to its long term average of around 3 per cent (between 1999-2000 and 2012-13).

Record food grains production of 264.4 million tonnes is estimated in 2013-14, as per the third advance estimates, indicating an increase of more than 20 million tonnes over the average production during the previous five years.

Horticulture production is estimated at 265 million tonnes in 2012-13 and for the first time has exceeded the production of food grains and oilseeds. The robustness of the agriculture and allied sector can be attributed to the steady increase in gross capital formation (GCF) in this sector.

‘CAD may dip to 2.1% this fiscal, will be fully financed’

India's current account deficit (CAD) is likely to fall to 2.1 per cent of the gross domestic product (GDP) in 2014-15 and will be fully financed in the current year, the government said on Wednesday. CAD, which is excess of foreign exchange outflow over inflows, declined sharply from a record high of $88.2 billion (4.7 per cent of gross domestic product) in 2012-13 to $32.4 billion (1.7 per cent of GDP) in 2013-14.

‘With close monitoring and policies calibrated to emerging contexts upfront, it is likely that the CAD may be limited to around $45 billion (2.1 per cent of GDP) in 2014-15, which is likely to be fully financed by stable sources of capital flows,’ said the Economic Survey for 2013-14 tabled by Finance Minister Arun Jaitley in Lok Sabha.

‘After staying at perilously unsustainable levels of well over 4 per cent of GDP in 2011-12 and 2012-13, the improvement in BoP (Balance of Payments) position is a welcome relief, and there is need to sustain the position going forward.’ Improvement in BoP in latter half of 2013-14 was indeed swift and owed to exceptional measures like restrictions on non-essential imports, limited period incentives for certain varieties of capital flows and impact of overall economic slowdown on imports, it said.

Hiking customs duty on gold and silver to a peak to 10 per cent, improving capital outflows through quasi-sovereign bonds and liberalisation of external commercial borrowings also helped control rising CAD. The survey said a longer-term outlook has already been outlined in terms of the fiscal consolidation roadmap leading to a fiscal deficit of 3 per cent of GDP in 2016-17. ‘Despite the global and domestic challenges, the economy achieved its targeted fiscal consolidation 2013-14. Nevertheless, this was achieved by cutting expenditure which is unsustainable for an economy.’

India's fiscal deficit remained at 4.5 per cent of the GDP in 2013-14. However, sustaining the robust outcome in the medium term is a challenge as some of the restrictions need to be gradually withdrawn. It said there is need to adjust to not merely the asset purchase taper by the US Fed but also to the eventual exit from the accommodate monetary policy stance by advanced economies.
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