Economic Outlook Survey

Highlights March 2014 Results of FICCI s latest Economic Outlook Survey point towards a recovery in the year 2014-15. The median GDP growth forecast is estimated at 5.5% for 2014-15, with a minimum and maximum range of 5.0% and 6.0% respectively. The industrial sector is projected to witness an uptick, with a median growth forecast of 3.3% in 2014-15. Though both agriculture and services sector growth are likely to be in line with broad expectations, pressure might arise on agriculture sector with chances of El Nino effect marring growth prospects next year. GDP growth in Q4 2013-14 is estimated at 5.0%, with a range of 4.6% and 5.6%. Anything below 5.2% growth in Q4 FY14 will pull down the estimated growth of 4.9% (as announced by Central Statistical Organization) for the full year. The median forecast for fiscal deficit as a percent of GDP for 2014-15 was put at 4.4%, with an indicative range of 4.1% to 5.5%. This is slightly higher than the 4.1% estimate announced recently in the interim budget. The possibility of subsidy bill overshooting leading to a fiscal slippage remains real. On the roadmap for fiscal consolidation for new government, participating economists were of the view that there is a pressing need to get the fiscal house in order and we should get back to pre-financial crisis deficit levels with utmost urgency. Further, both Wholesale Price Index and Consumer Price Index are projected to be with in range. Headline inflation rate (WPI) is expected to be around 5.5% in 2014-15 with a lower and upper limit of 5.0% and 6.3% respectively. CPI is projected to be around 7.9% in 2014-15. On the external front, export growth is likely to see an improvement in Q1 2014-15 supported by a recovery in advanced economies. The CAD to GDP ratio will remain in the comfort zone and is expected at 2.2% in 2014-15. With regard to Central Bank s stance in the forthcoming policy (April 1, 2014), a majority of economists felt that the Reserve Bank of India (RBI) would keep key rates unchanged. Also, respondents felt that giving an impetus to industrial growth is the need of the hour and this can be achieved by getting the investment cycle back on track. It was mentioned that the government should seriously work towards debottlenecking sectors like mining and creating a stable and transparent policy framework conducive for businesses. Survey Profile The present round of FICCI s Economic Outlook Survey was conducted in the month of March 2014 and drew responses from leading economists representing industry, banking and financial services sector. The economists were asked to provide their forecast for key macro economic variables for the year 2014-15 as well as for Q4 (Jan - Mar) FY14 and Q1 (Apr Jun) FY15. In addition, FICCI sought views of the economists on some topical subjects like roadmap for fiscal consolidation, efficacy of CPI as a new monetary policy tool and the steps that should be taken up by the new government to revive industrial growth. 1 P a g e

Survey Results Projections for key macro-economic variables* Annual (2014-15) Q4 FY14 Q1 FY15 Growth Median Min Max Median Min Max Median Min Max GDP 5.5 5.0 6.0 5.0 4.6 5.6 5.2 4.4 5.7 Agriculture & Allied 3.3 2.5 5.7 4.3 3.0 5.6 3.2 2.0 5.5 Industry 3.3 1.8 4.4 1.1-0.8 2.7 2.0 1.2 3.2 Services 7.0 6.1 8.3 6.7 5.7 7.8 6.5 5.9 7.9 IIP Growth Forecast (%) 5.5 WPI Growth Forecast (%) 3.0 1.8 5.1 5.3 1.1 CPI Growth Forecast ( %) 8.3 8.2 Gross Fixed Capital Formation (% of GDP at current market prices) 30.0 7.9 29.4 29.4 *The findings of the survey represent views of leading economists and do not reflect views of FICCI. All forecasts represent median values. The latest round of FICCI s Economic Outlook survey pegs GDP growth rate at 5.5% for the year 2014-15. The estimate of GDP growth ranges between a minimum of 5.0% and a maximum of 6.0%. Agriculture sector is expected to grow by 3.3% in the next fiscal year. However, the possibility of 2014 being an El Nino year may affect the growth prospects of agriculture sector. Respondents expect the industry sector to recoup, with a projected growth of 3.3% in 2014-15. The industrial growth estimate ranges between 1.8% (minimum) and 4.4% (maximum). Meanwhile, service sector performance is expected to remain consistent with a growth rate of 7.0% in 2014-15. As for quarterly projections, GDP growth rate for Q4FY14 is expected to touch 5.0%. However, this implies that growth in 2013-14 will be a tad lower than the estimate of 4.9% put out by Central Statistical Organization a couple of months back. The quarterly growth is expected to improve further in Q1 FY15. The participating economists have put out a growth rate of 5.2% in Q1 FY15, with a range of 4.4% and 5.7%. Industrial sector is likely to see a better performance with a growth of 2.0% in Q1 FY15. However, the performance of services sector might be in for some moderation with 2 P a g e

an estimated growth of 6.5% in Q1 FY15. Both headline and retail inflation have been on a downward trajectory and inflation rate is expected to remain range bound going ahead. Headline inflation is expected to ease to 5.5% in 2014-15 with a lower and upper limit of 5.0% and 6.3% respectively. CPI is expected at 7.9% in 2014-15. The median forecast for fiscal deficit as a percent of GDP was estimated at 4.4% for 2014-15. This is slightly higher than the 4.1% estimate announced in the interim budget recently. The subsidy overhang can lead to a fiscal slippage. The indicative range for fiscal deficit for the next year is between 4.1% and 5.5%. Survey Results 340.0 Merchandise Export (in $ Bn) 490.0 Merchandise Import (in $ Bn) 83.2 80.2 110.7 119.1 Exchange rate (Rs/USD) 61.1 61.0 61.0 2014-15 (end March 2015) Q4 FY14 (end Mar 2014) Q1 FY15 (end Jun 2014) *The findings of the survey represent views of leading economists and do not reflect views of FICCI. All forecasts represent median values. On the external front, though the situation is by and large under control, the export growth has become sluggish. Export growth is estimated at 0.8% for Q4 FY14 and this is likely to clock an improvement in the next fiscal year. The export growth for Q1 FY15 is pegged at 5.5% and at 7.6% for 2014-15. The steady recovery in advanced economies is likely to bode well for India s exports. Though import growth is expected to remain in negative terrain in Q1 FY15, the forecast for the whole year is estimated at 5.9%. According to survey results CAD as % of GDP will remain in the comfort zone and is expected at 2.2% in 2014-15. The Rupee value is forecasted at 61.0 against US dollar by end March 2015. The expected range is 57.5 (minimum) to 65 (maximum). Rupee value has been floating in a stable range of 61-62 to a dollar since mid-september 2013. 3 P a g e

VIEWS OF THE ECONOMISTS ROADMAP FOR FISCAL CONSOLIDATION FOR NEW GOVERNMENT The fiscal deficit as a percent of GDP was contained at 4.6% in the year 2013-14. Further, it was announced in the interim budget that government would strive to stick to the path of fiscal consolidation and that the fiscal deficit would be contained at 4.1% of GDP in the year 2014-15. A majority of participating economists in the survey felt that the government was able to lower the deficit in FY14 due to a sizeable reduction under plan heads, rolling over of subsidies and a higher amount of dividend payments from public sector enterprises. They indicated that there has been no noticeable improvement on the revenue side. As for the target of achieving a lower deficit level in the year 2014-15, it was pointed out that this might be a little difficult to achieve. Giving an impetus to growth and undertaking fiscal consolidation concurrently will be challenging for the incoming government. Going ahead, enhancing revenues might not be as easy because growth continues to remain feeble and we cannot afford to compromise on capital expenditure any further. Plan expenditure has already been axed in the last two fiscal years which has had an adverse impact on capacity additions. The participating economists were of the view that there is a pressing need to get the fiscal house in order and we should move back to pre-financial crisis deficit levels with utmost urgency. This should be done by laying focus on the revenue side. The target should be to eliminate revenue deficit. India s subsidy burden has ballooned considerably in the past few years and it is imperative that we take a stand and restrict non-productive subsidies. The government must allow market prices to play a role. It was also indicated that the incoming government might undertake greater developmental expenditure that could possibly strain the fisc keeping it at an elevated level. However, at the same time it was also mentioned that containing the fiscal deficit to lower levels is probable in the medium term provided measures focusing on curtailing non-plan expenditure, rationalizing subsidies and realigning spending towards investment and social sectors are undertaken. The likely roadmap for fiscal consolidation for the next government should include the following: Rationalize subsidies on cooking gas and diesel at Central level and electricity at State level. The government should seriously re look at the subsidy structure and undertake steps to eliminate unwanted subsidies and streamline the existing ones. This should be based on the requirements of the populace and should strictly reach only the correct target groups. Plug leakages in various welfare schemes by strengthening AADHAR platform. Faster implementation of direct cash transfer scheme will help contain the outgo on subsidies. Expedite implementation of Goods & Service Tax (GST) and Direct Tax Code. Undertake more measures to reduce cost of tax administration and enhance tax compliance with better use of technology. Undertake disinvestment in public sector units. Priority to be given to revive the investment cycle. 4 P a g e

RBI s STANCE ON MONETARY POLICY (April 1, 2014 Review) Both Wholesale Price Index (WPI) and Consumer Price Index (CPI) have witnessed moderation in the past couple of months. A majority of economists felt that the Reserve Bank of India (RBI) may draw some comfort from softening price levels and it is likely to keep the key rates unchanged in the upcoming monetary policy review on April 1, 2014. Respondents were of the view that the Central Bank will continue its close vigil on inflation numbers. The current moderation in CPI & WPI is largely due to a noticeable decline in food prices and the risk of further spike in prices of this segment is a distinct possibility. Also, RBI would closely monitor core inflation numbers which remain elevated. Rising core WPI inflation points towards a cost-push risks building up as the manufacturers struggle passing on increases in input costs to safeguard margins. A persistent decline in price levels along with falling core inflation will be essential for RBI to accommodate growth considerations and allow for a cut in key policy rates. EFFICACY OF CONSUMER PRICE INDEX (CPI) AS THE NEW POLICY ANCHOR Views of the participating economists on Consumer Price Index (CPI) as the new policy anchor were somewhat divided. While one set of respondents felt that CPI is certainly a good indicator, the other set were of the opinion that monetary policy decision undertaken on the basis of a single parameter may not be a correct approach. Those in favor of retail inflation as a policy anchor pointed out that CPI is definitely better than the Wholesale Price Index (WPI) as the former reflects demand side pressures better. Also, the services sector which has a share of about 60 per cent in India s GDP is duly reflected in the CPI. The services sector carries a weight of about 26 per cent in CPI and includes basic services like healthcare, entertainment, education. The same is not covered under WPI. In addition a higher weightage is given to food and fuel components which form a major proportion of consumption basket in India. Under WPI the highest weight is assigned to manufacturing sector, which is about 65 per cent in the overall inflation index. Contrary to above, a group of respondents felt that the new CPI is a fairly new series available only since 2011 and hence does not adequately portray the underlying trends. It was also mentioned that a multiple indicator approach should be used to guide monetary policy as recent experience suggests that focusing narrowly on a single variable is not justified. We could be ignoring warning signs from other variables like gdp growth, asset prices, exchange rates and term structure of interest rates, which are as important indicators to maintain economic and financial stability. In addition, it was also pointed out that India is a country in need of capital but has a high interest rate structure. Therefore investment tends to follow demand with a lag thereby leading prices to edge up. Though this adds to inflationary pressures but paves way for lower prices in the long run as new capacities come on board. Thus while keeping a tab on inflation is important but the overarching objective should be promoting growth. GIVING AN IMPETUS TO INDUSTRIAL GROWTH The industrial growth has remained frail for almost two years now and any signs of recovery are still elusive. Reviving growth in the sector is critical as we need to generate more jobs. The respondents cited high borrowing costs and delays in securing government approvals as the key reasons that have stalled corporate investments. Also, persistently high inflation and interest rates has forced households to cut consumption expenditure and the demand situation continues to stay weak. 5 P a g e

The latest data on industrial production clocked marginal improvement in January 2014 after contracting for three consecutive months; however the situation is still far from a turnaround as lack of positive outlook among businesses remains pervasive. Investment demand is fragile and would require more action on policy side. Lowering interest rates can help perk up the sentiment among manufacturers. Also for export oriented business, infrastructure and high transaction costs need to be improved to boost exports further. It was also pointed out by the respondents that while India seeks foreign investments, it should also ensure that our domestic industry is not impacted by unfair competition. In order to step up growth in industrial sector following suggestions were made: Undertake institutional reforms such as labor market reforms, enhancing investments in human resource development and better regulation of natural resources. Introduce stronger structural policies to support investments. Speedy clearances by regulators, reliable tax regimes, and lower business transaction costs. The government should debottleneck sectors like mining which will gradually result in private sector investments coming back. For a sustained growth in the industrial sector, we urgently need to ensure an upturn in investment activity. The government had taken the initiative of setting up the Cabinet Committee on Investments (CCI), which has proactively cleared a slew of pending projects. However, the focus should now be on implementation of the projects cleared by CCI. Also steps should be taken to boost demand in the public sector. Enhancing investments in infrastructure sector is likely to have a multiplier effect on the economy. While that definitely remains a top priority for the government, but off late the development of new infrastructure projects has witnessed a slowdown and various existing projects are facing delays. We certainly have to step up on this front and accelerate infrastructure development. In addition, mobilizing long-term funding sources for infrastructure projects is imperative. Introducing Goods and Services Tax. The Government and RBI need to work in tandem to bring forth policies for better supply chain management to tackle food inflation and lower the policy rates to stimulate industrial production. Need to integrate regional agricultural markets and streamline the APMC Act. 6 P a g e

Outlook 2014-15 Appendix Outlook Q4 Outlook Q1 2013-14 2014-15 Key Macroeconomic variables Mean Median Max Min Mean Median Max Min Mean Median Max Min GDP growth rate at factor cost (%) 5.5 5.5 6 5 5 5 5.6 4.6 5 5.2 5.7 4.4 Agriculture & Allied 3.4 3.3 5.7 2.5 4.2 4.3 5.6 3 3.2 3.2 5.5 2 Industry 3.2 3.3 4.4 1.8 1.3 1.1 2.7-0.8 2.1 2 3.2 1.2 Services 7.1 7 8.3 6.1 6.8 6.7 7.8 5.7 6.7 6.5 7.9 5.9 Gross Domestic Savings (% of GDP) 31.3 31 34 30 - - - - - - - - Gross Fixed Capital Formation (% of GDP at current market prices) Fiscal Deficit (as % to GDP) Centre 30.3 30 34.5 28 29.9 29.4 33.5 27 30.3 29.4 34.5 28 4.5 4.4 5.5 4.1 - - - - - - - - Growth in IIP (%) 3.5 3 5.7 2 1.2 1.1 3.7-0.5 2.1 1.8 4.2 1.2 WPI Inflation rate (%) 5.5 5.5 6.3 5 5.2 5.1 6 4.8 5.2 5.3 6 4.5 CPI combined new inflation rate (%) 7.7 7.9 8.5 5.8 8.2 8.3 9.1 6.5 8 8.2 8.7 6 Prime lending rate - - - - - - - - 11.6 10.2 14.8 9.9 Money supply growth M3 (%) (end period) 14.5 14.5 16 13 - - - - - - - - Bank credit growth (%) 15.5 15 17.5 14 - - - - - - - - 7 P a g e

Outlook 2014-15 Outlook Q4 Outlook Q1 2013-14 2014-15 Key Macroeconomic variables Mean Median Max Min Mean Median Max Min Mean Median Max Min Repo Rate (end period) 7.5 7.5 8 7.25 8 8 8 7.75 7.75 7.75 8 7.5 Merchandise Export Value in USD billion 346.2 340 372.6 332 83.2 83.2 85.5 80.8 80.3 80.2 88 73.3 Growth (%) 7.8 7.6 13 4 1.7 0.8 5.9-1.9 5.4 5.5 11 1.1 Merchandise Import Value in USD billion 494.3 490 537.1 464 114 110.7 138 105 122.8 119.1 140 111 Growth (%) 5.9 5.9 15-6.8-10.5-11.4-1.7-15.5-2.7-4.5 6.5-9.5 Trade Balance (% to GDP) -6.5-8 -7.5-9.5-6.7-5.9-5.3-10.1-8.4-8.5-6.2-10.5 CAD Value in USD billion -46.6-42.1-32.7-85 -3-3.1-0.9-4.9-7.9-7.1-3.9-13.4 as % of GDP at current price -2-2.2-2.8-4 -0.8-0.8-0.2-1.7-2.2-1.9-1.4-3.3 US$ / INR exchange rate (end period) 61.2 61 65 57.5 61.2 61.1 62.2 60 61 61 63 60 8 P a g e