Economic Advisory Council’s Review of the Indian Economy

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May 22 – The Economic Advisory Council (EAC) to the Prime Minister in India has recently released their annual Review of the Economy for 2012-13. The report highlights economic activity for the 2012-13 fiscal year and forecasts the economic outlook for the 2013-14 fiscal year.

The EAC’s conclusions suggest that while growth has been slow in India since 2011, there is great room for improvement in the coming years due to rising gross domestic product (GDP) estimates and strengthening consumer sentiment.

Economic Growth and Inflation
The EAC expects the economy to grow at a rate of 6.4 percent in 2013-14, up from 5 percent in the previous year. Furthermore, growth may be higher if policy and administrative measures are successfully implemented to support consumer sentiment.

Inflation is expected to sit around 6 percent during the 2013-14 fiscal year. Inflationary pressures will be strongest in the food sector, with a projected 8 percent inflation rate, and fuel sector, with a projected 11 percent inflation rate. Manufactured goods won’t feel the same inflationary strain, with an estimated 4 percent inflationary rate.

Investment and Savings
Investment remains high in India, with estimates for 2012-13 at 35.8 percent of GDP, comparable to levels seen during the country’s booming years in the mid-2000s.

The EAC outlined several obstacles to attracting investment, including power shortages, infrastructure bottlenecks, slow government approval processes and increased input costs. The newly formed Cabinet Committee on Investment will encourage reforms designed to address these issues.

Excess demand exists for all variety of investments, including housing, electricity, and transportation infrastructure.

The domestic savings rate fell from a peak 36.8 percent of GDP in 2007-08 to 30 percent in 2012-13. An increase in imported gold consumption as a store of value likely contributed to this decrease. The government savings rate is negative, eroding some GDP gains.

Merchandise exports fell by 3 percent in 2012-13, while imports increased slightly. India’s trade deficit reached $195 billion, up 6.3 percent from the previous period. The trade deficit, on a Balance of Payments basis, is 10.9 percent of GDP.

Engineering goods and textile exports showed the largest slowdown, while pharmaceutical and chemical exports remained strong.

The EAC expects exports to reach $328 billion for the 2013-14 fiscal year, an increase of 10.8 percent over the previous period. The trade deficit is expected to grow slightly to $208 billion.

The current account deficit (CAD) is forecast to grow to $100 billion from $94 billion in 2012-13, but the CAD will be a smaller portion of GDP: a positive sign.

Corporate Financial Trends
Quarterly financial data reveals a three-year trend of declining profitability and decreased net sales. According to the EAC however, operating margins have shown improvement, which could lead to improved sentiment. Projections for 2013-14 show a slow first quarter with financial results improving throughout the rest of the fiscal year.

Monetary and Fiscal Outlook
India has maintained tight monetary policy to slow the growth of inflation. The policy rate is currently set at 7.5 percent and the cash reserve ratio is set at 4 percent. The EAC believes monetary rates will remain fluid as the economic situation for 2013-14 becomes clearer.

The current fiscal deficit is seven percent of GDP, near the six percent target. Tax revenues are expected to increase to 18.4 percent in the coming fiscal year if the projected economic growth occurs.

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