Contents

Preface. ..................................................................1 Economic Journey FY13 .......................................2 Economic Outlook FY14..................................... 10 Special Article...................................................... 15 Some Concerns to Growth................................. 17 D&Bs Key Macroeconomic Forecast.................. 18

Preface
Growth of the Indian economy during FY13 has decelerated faster than what D&B had envisaged in April 2012. Policy drift, persistent inflationary pressures and subdued global demand were primarily responsible for growth turning out to be weaker than anticipated. The economy is now at a critical stage where the revival is contingent on how quickly policy correctives are put in place to address structural bottlenecks and encourage investment. Our economic expectations for the current fiscal are modest at best. Over the short term, global uncertainty is likely to hold back higher growth. The strength of the domestic economy, however, will help renew growth. The easing of monetary policy by the RBI since January 2013 will also aid in the restoration of the investment and hence the industrial activity. A recovery, even if modest, still appears possible if certain key policy reforms are implemented on an urgent basis. This could go a long way in stimulating investment and reviving business sentiment. As the economy navigates its way through the next 12 months, a host of factors will continue to place strain on economic activity. These include political uncertainty, unhealthy fiscal situation and policy and administrative uncertainty on the part of the government. It has become imperative for businesses to track the economic environment on an ongoing basis when changes come in such a dynamic fashion; when perceptions on where macroeconomic risks lie are so numerous and changing so often; when the immediate business environment becomes so closely linked with events that are largely beyond our immediate control. This report has been prepared with the idea of providing a forecast of key macroeconomic variables, which will determine the course of the business environment over the next fiscal.

Economic Journey FY13

The slowdown in growth which prevailed during FY12 continued during FY13 as well. Belying all expectations of some recovery during the second half of the fiscal year, the downturn in growth intensified as the year passed by. Indias GDP during FY13 is estimated to have recorded the lowest growth during the last ten years. However, unlike the slowdown encountered during 2008 crisis, this time around the slowdown was broad based with private consumption demand, the primary factor behind the revival of the economy during FY11, weakening considerably. Moreover, the fiscal stimulus and the rapid growth which fuelled demand without considerable attention paid to augment the supply-side channels led to high and sticky inflation. Persistent inflationary pressures, policy drift, low business confidence and stalled investment activity, fall in the savings rate and high fiscal and current account deficit had dented the growth momentum. Not only the RBI or the Government, all the major institutions, domestic as well as foreign had significantly scaled down the growth projection of India. The Planning Commission scaled down the average annual growth target of the economy to 8.0% from 9.0% conceived earlier for the Twelfth Five Year Plan. The severity of the domestic issues compounded the external threat posed by the turmoil in the global economy. The Euro Zone still continues to remain mired in recession, slower than expected recovery of the US economy, deepening economic crisis in Japan, moderation in growth in China coupled with slowdown in other emerging countries. Weak global economic activity has impacted the services sector immensely which had remained resilient so far. The significant slowdown of the services sector which accounts for around 56% of the overall growth of the Indian economy is a cause of serious concern. Ballooning trade deficit and fall in primary income mainly owing to increase in investment income payments due to servicing of rising external liabilities has exacerbated the current account deficit (CAD) during FY13. The current account deficit has risen to around 6.7% during Q3 FY13 well above the sustainable threshold of 2.5 to 3.0%. Financing the huge CAD is a serious concern as most of it is covered by short term and volatile portfolio inflows. Foreign direct investment has fallen compared with a year ago due to sluggish economic growth, hurdles in getting approvals and worrying tax issues. While equity inflows have gone up significantly following the quantitative easing adopted by several countries. As a result Indias external liabilities have increased. Data on external debt shows that the ratio of short term debt to external debt stood at 24.4%, the highest since March 1991, reflecting the vulnerability of Indias external payment situation. Despite various measures undertaken by the government including export diversification, exports fell during FY13. With import demand for oil and gold remaining inelastic despite slowing growth, trade deficit increased considerably. With the government curbing down its spending to rein in the fiscal deficit, the community, social & personal services segment of the services sector is expected to grow modestly during the second half of FY13. Further, the continuous deceleration in the industrial growth had also weighed down the services sector as evidenced

in the significant moderation in the trade, hotels, transport and communication segment. The sustained deterioration in the industrial sector has larger implications in terms of creating of jobs to absorb the growing working population in India. Industrial growth remained subdued since July 2011 due to the lack of significant policy reforms, regulatory hurdles limiting investment, supply and infrastructure bottlenecks, high input prices, lack of demand - both domestic and external and low business confidence. While, growth has been weak across all industrial segments, contraction in the capital goods and mining had in particular largely impacted the industrial output. Decline in mining output since Q2 FY12 (except during the months of Jul-11, Feb-12 and Sept-12) primarily due to regulatory and environmental issues had adversely impacted the manufacturing sector. Shortages in coal supply along with uneven monsoon had led to moderation in the power generation which in turn had affected the production activities, especially of the small and medium-scale industries. Besides high input cost, bleak investment scenario and most importantly clouded domestic policy environment had led to the deterioration in the industrial production. Low credit disbursement, on account of high interest rates, risk aversion by banks due to rising NPA levels and low mobilisation of deposits, had also impacted the investment as well as the industrial production. During FY13 (upto end-Dec-13) the number of projects being shelved or stalled had increased significantly. Despite weak industrial activity, RBI was unable to lower the interest rates as inflationary pressures remained stubbornly high. Although, RBI reduced the repo rate by 50 basis points during April 2012, ending its tight monetary policy stance, it paused thereafter as the upside risk to the headline inflation loomed large given the incomplete pass-through

of the global oil prices, rupee depreciation and the uptrend in the food prices which in turn had the potential to feed through into core inflation. WPI inflation remained above 6.0% since December 2009 till February 2013 i.e. for 39 months. The RBI decided to cut the policy repo rate in January 2013 and again in March 2013 as overall growth decelerated strongly, WPI inflation started easing and core inflation moderated substantially indicating cooling down of demand side pressures to inflation. In conjunction with slowdown in industrial and services sector, the other factor which failed to provide support to growth during FY13 was the poor performance in the agriculture sector which shows that Indias agriculture sector still remains dependent on the vagaries of the monsoon. While it cant be denied that the government has not focused on improving the supply chain in the agriculture sector, more still needs to be done. In lieu of the sustained deterioration in the growth and waning business sentiment the government had finally initiated several reform measures since September 2012, to boost the business sentiment, consolidate its finances and improve the investment environment after a long period of policy stasis. However, much needs to be done on various fronts. The pace of reforms that has been started should continue uninhibited and needs to be effectively implemented so that it translates into tangible investment decisions. Most importantly, India needs to focus on measures which would improve its productivity and enhance its business competitiveness.

A quick glance into the year gone by

GDP at factor cost constant prices Source :CSO

E: estimated

Source: CSO

During FY13, GDP fell to a decadal low, with the services sector witnessing a substantial moderation. The slowdown reflects the uncertain global macroeconomic environment as well as domestic factors.

IIP continued to remain volatile registering a decline for 6 months during the period Apr-Feb FY13. Capital goods continued to remain in the negative zone throughout the current fiscal year (Apr - Feb FY13) except during the month of Oct -12 due to festival related demand.

Source :CSO

E: estimated Source: CSO

While the industrial sector continued to languish amidst high input prices and interest rates, lackluster investment, regulatory bottlenecks and slowdown in demand, services sector moderated significantly to 6.7% from the near double digit growth levels witnessed during the earlier years.

The sustained poor output in the mining sector and dismal performance in the manufacturing sector had led to the deterioration in the industrial production as given by IIP. The mining sector continues to be in the negative zone since Jun-11 barring three months (Jul-11, Feb-12 and Sept-12).

Source: CSO

Source : Ministry of Commerce & Industry

Consumption demand weakened considerably during the year with the consumer durables posting a negative growth for the three successive months of Dec-12, Jan-13 and Feb-13. Data on car sales for the month of Feb-13 shows that passenger car sales have declined by 25.7% (y-o-y), the lowest since Oct-01.

Apart from the coal and refinery products which witnessed a higher growth during Apr-Feb FY13 as compared to the previous year, production in all other segments remain subdued. Policy uncertainties in areas such as iron ore and coal mining have adversely affected the output of the steel and power industries.

Source : Ministry of Commerce and Industry Source : CMIE

The number of projects stalled/shelved or abandoned had increased considerably since Sept 2011 quarter reflecting the weak investment scenario. Projects got stuck owing to delay in approvals and clearances, cost overruns, low credit disbursement and slowdown in the overall economy.

WPI Inflation has come below 6.0% for the first time after a gap of about 39 months. Weak domestic demand and lower global commodity prices contributed to the moderation of headline inflation.

Source : Ministry of Commerce and Industry

Source : RBI

Softening of global commodity prices and lower pricing power of corporates domestically has led to slowing down of the non-food manufactured products inflation. Non-food manufactured products inflation, continued to ebb since September 2012, enabled by softening prices of metals, textiles and rubber products. Inflation in manufactured items moderated to 4.5% in Feb-13.

The RBI decided to cut the policy repo rate in January 2013 by 25 basis points and again in March 2013 by 25 basis points as overall growth decelerated strongly. As part of the liquidity enhancement measures CRR was reduced in three trances by a total of 75 basis points and statutory liquidity ratio (SLR) was reduced by 100 basis points. The RBI also conducted open market operations and infused liquidity through daily liquidity adjustment facility (LAF)

Source : Ministry of Commerce and Industry

Food inflation remains high as price pressures, continued to remain significant for cereals and pulses due to the impact of the delayed and skewed south-west monsoon. Inflation in protein-rich food items also remains elevated.

Source : RBI

Due to lower deposit mobilisation, credit deposit ratio have risen to a record high and hovered above 78.0% for the fortnight ending 8-March-13. Risk aversion by banks, low mobilisation of deposits, and subdued demand has led to low credit growth. Low growth in deposits resulted as investors parked their funds into other high yielding asset classes like gold and real estate.

Key deficit indicators widen (as a % of GDP)

Revenue Deficit (RD) FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source : RBI FY12 FY13 (RE) 2.4 2.5 1.9 1.1 4.5 5.2 3.2 4.4 3.9 Fiscal deficit (FD) 3.9 4 3.3 2.5 6 6.5 4.8 5.7 5.2 RD as % of FD 62.3 63 56.3 41.4 75.2 81 67.5 76.4 75.1

Data on sectoral deployment of credit reveals that while credit growth had moderated across all sectors, credit disbursement to the industry fell at a sharper pace. Credit growth to industry (Micro & Small, Medium and Large) stood at 14.7% as on February 22, 2013 as compared to 19.1% as on February 24, 2012 and 26.5% as on February 25, 2011. Moderation in credit growth to the services was particularly evident from December 2012.

RE=Revised estimates Source: Ministry of Finance

Fiscal deficit for FY13 at 5.2% has been marginally higher than the budgeted estimate of 5.1%. Following the recommendations of the Kelkar Committee, the government had unveiled a revised fiscal consolidation roadmap. To address fiscal imbalances, the government has partially deregulated the prices of diesel. Besides, the annual supply of subsidised LPG cylinders per household has been increased to nine.

Source : CSO

Overall demand conditions in the economy remained weak during FY13. Private consumption expenditure decelerated primarily owing to high inflationary pressures.

Source : RBI

Although the 10 year G-sec yield moderated from the previous year, it still remains elevated above 8.0%. The 10-year G-sec yield declined from 8.63% at end-March 2012 to 7.99% on January 1, 2013 and further to 7.88% as on January 24, 2013. No

additional market borrowing, policy rate cut, resumption of OMO purchases by the Reserve Bank led to easing of the 10-year G-sec yields towards the end of the fiscal year.

fully financed. The pickup in capital flows was mainly due to foreign portfolio investment which rose to US$ 8.6 billion during Q3 of 2012-13 from US$ 1.8 billion in Q3 of previous year. While, FDI declined to half to US$ 2.5 billion during Q3 FY13 from US$ 5 billion during the same period last year. During April-December 2012, CAD accounted for 5.4% of GDP as against 4.1% of GDP in the same period of 2011.

Source : Ministry of Commerce and Industry

Indias exports declined by 1.8% (y-o-y) during FY13 to US$ 300.6 bn while imports moderated by 0.4% to US$ 491.5 bn leading to a trade deficit of around US$ 191 bn. Weak external demand combined with continuing high imports of POL and gold, resulted in deterioration of the trade balance. Slow down in developed economies coupled with lower growth in Asian economies has weighed on Indias external demand.

Source : RBI

At end-Dec 2012, the ratio of short term debt to external debt stood at 24.4%, the highest since March 1991, reflecting the vulnerability of Indias external payment situation. The ratio of short-term debt to foreign exchange reserves stood at 31.1% at end-December 2012, as compared to 26.6% at end-March 2012

Source : RBI

The CAD to GDP ratio stood at 6.7% during Q3 FY13 widening from 5.4% during Q2 FY13 driven mainly by larger trade deficit. With the surge in capital inflows, CAD during the quarter could be

Source : RBI

Indias foreign exchange reserves have been moderating since the last two years. Indias foreign exchange reserves provided a cover of 78.6% to the total external debt stock at end- December 2012 (as compared to 85.2% at end-March 2012 and 99.7% at end-March 2011).

Source : BSE Sensex

The BSE Sensex and S&P CNX Nifty crossed the 20,000 and 6,000 mark, respectively after two years. The BSE Sensex closed at 20,026.61 on January 23, 2013. Hike in diesel price, cap on subsidised LPG, permission for FDI in retail and aviation and the passing of the Banking Laws (Amendment) Bill, 2011 in Parliament, along with hopes of a cut in the policy rate by the Reserve Bank and sustained FII inflows helped revive the domestic equity market.

Economy Outlook FY14

Real GDP to grow by 6.5% during FY14

Source: CSO and D&B India

E: D&B estimates F: D&B forecast

Source: CSO and D&B India

E: D&B estimates F: D&B forecast

Although Indias growth is expected to revive during FY14 from the decadal low witnessed during FY13, the pace of recovery is expected to be quite sluggish as the outcome of the reforms and measures taken by the government to boost the investment sentiment and the economic growth will take some time to materialize. Moreover, revival in the industrial activity will require the government to continue with its reform measures. The easing of monetary policy by the RBI since January 2013 will also aid in the restoration of the investment and hence the industrial activity. We expect the slowdown in the global economic activity to stabilize and waning of uncertainty among the corporate and the consumers and fiscal consolidation undertaken by the government to provide support to the economic growth. Assuming a normal monsoon, D&B expects the GDP to record an average growth of 6.5% during FY14.

Disaggregating GDP data on a sectoral basis, the recovery in growth is expected to be driven by the services and the industrial sector. While the agriculture sector is expected to register a higher growth of 3.4% during FY14 as compared to an estimated 1.9% during FY13, its share in overall growth is expected to be lower during FY14 as compared to the previous year. The services sector which would occupy the largest share in overall growth is expected to remain resilient during FY14 as compared to the substantial moderation recorded during FY13. Expected improvement in domestic market conditions and some stability in the global economic activity coupled with easing credit conditions are likely to help the service sector to grow by 7.9% during FY14 from an estimated 6.7% during FY13. The services sector will still remain elusive of the near double digit growth rates enjoyed during FY06 to FY11 as the domestic industrial sector as well as the global economy is likely to take some more time to revive completely and grow strongly. The industry segment - comprising of manufacturing, construction, mining and electricity which was

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impacted by the regulatory bottlenecks, high interest rates and input costs is expected to register a moderate growth of 4.8% during FY14 from an estimated 3.1% during FY13. The ailing industrial sector is likely to get a boost primarily from the easing monetary policy and the governments thrust to stimulate the investment sentiment and the overall investment scenario.

Private consumption demand likely to be higher in FY14

Moderation in interest rates will improve the retail credit availability, in turn boosting consumption. Increase in allocation in social sector in the Union Budget FY14 is likely to drive the consumption in rural areas. Thrust in infrastructure investment will also help to boost demand Discretionary spending will lead the overall growth in PFCE in FY14.

Industrial activity to moderate improvement

witness

Source: CSO and D&B India

E: D&B estimates F: D&B forecast

Moderation in private final consumption expenditure (PFCE) during FY13 turned out to be much more intense than estimated by D&B at the beginning of the year. During first three quarters of FY13, PFCE registered a growth of 2.9% (y-o-y) as against a growth of 7.4% (y-o-y) in the same period previous fiscal. Inflationary pressures, moderation in income, elevated interest rates and weak consumer sentiments had dragged down the consumption activities in FY13. D&B expects PFCE to register a moderate growth of 4.0% in FY13 as against a growth of 8.0% during FY12 and to recover and grow at around 6.4% in FY14. The recovery in PFCE will be driven by the following factors: Likely moderation in inflation would increase purchasing power of the households and might stimulate consumption.

Source: CSO and D&B India

E: D&B estimates F: D&B forecast

IIP growth during FY13 continued to remain plagued by regulatory bottlenecks limiting investment, supply and infrastructure bottlenecks, high input prices and lack of demand - both domestic and external. D&B expects IIP to grow and revive to some extent during FY14 as compared to an estimated dismal growth of 1.2% during FY13. D&B expects IIP to grow by 3.7% during FY14 on account of: Further easing of monetary policy Thrust given by the government to promote industrial growth Revival in investment activity to some extent Moderation in WPI inflation to ease the input cost and drive demand Gradual improvement in the business sentiment

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Savings rate to improve marginally

Investment marginally

rate

to

improve

Source: CSO and D&B India

E: D&B estimates F: D&B forecast Source: CSO and D&B India E: D&B estimates F: D&B forecast

The saving propensity of the domestic economy has been severely impacted by the persistently high inflationary pressure, relatively slower adjustment of bank deposit rates, volatility in the Indian equity market and lower profitability and weak balance sheet of the corporate. D&B forecasts Indias savings rate to improve marginally to 30.3% during FY14 from the estimated low of 29.2% during FY13. Factors that would aid the increase in savings rate are: Governments initiatives to boost the savings of the household sector Easing of inflationary pressures Lower fiscal deficit Revival in domestic sentiment

Deferment of planned projects and increase in the number of stalled projects due to delay in the approval process for projects, regulatory hurdles, cost increases eroding profitability and impending new investment prospects have severely impacted the investment rate during FY13. D&B expects investment rate to improve marginally to 35.1% in FY14 from an estimated 34.9% in FY13. Increase in investment rate is expected to be supported by the following factors: Improving business optimism Continued easing of monetary policy to support investment climate Fiscal consolidation and series of measures announced by the government to facilitate investment activity Continued thrust on infrastructure development

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Bank credit

likely to remain lower during FY14 as compared to FY13 as credit and liquidity conditions gradually improve.

Inflationary pressures

Source: RBI and D&B India

F: D&B forecast

Risk aversion by banks due to rising NPA levels along with high interest rates impacting credit demand have dented the credit growth during FY13. D&B expects the credit growth to improve from the low rates of 14.7% in FY13 to 17.0% in FY14 due to the following factors: Further easing of the policy repo rate during FY14 Improving liquidity conditions would support credit disbursement by banks Higher credit demand as economic activity gathers momentum

Source: Ministry of Commerce & Industry, D&B India F: D&B forecast

Interest rates
Interest rates are expected to moderate during FY14 as the RBI has already started lowering down the policy rate. Inflation has started moderating with the core inflation trending along the RBIs comfort zone and growth has decelerated sharply which will provide RBI the headroom for further easing its monetary policy. The still high fiscal deficit and consequent increase in market borrowing by the government is likely to keep the G-sec yield elevated during FY14. D&B expects the 10-year G-sec yield to be around 7.7% by end of FY14 as compared to previous close of 8.04% during FY13. The yields of the T-bills are

D&B expects the WPI inflation to moderate considerably and average at around 5.7% during FY14 from 7.4% during FY13. Slowing down of economy and excess capacity in some sectors is expected to aid in cooling down of inflation. Pass through of fuel price adjustments is likely to provide some upward pressure to overall inflation. However, declining international commodity prices, including global crude oil is likely to aid in moderation in inflation. Further, easing of some supply side constraint and fiscal consolidation by the government is likely to help in subsiding inflationary pressures.

Rupee to witness some appreciation

D&B expects rupee to appreciate significantly during FY14. Rupee is expected to gain in the second half of FY14 and be around ` 52.50 per US$ at end FY14 registering a 3.5% appreciation in its value. Surge in foreign capital inflow will drive the appreciation in the rupee value. Moreover, fall in prices of gold and global crude oil prices is likely to support rupee.

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Fiscal deficit to remain high

The slowing down of the economy constraining generation of tax revenue, as well as the collection of non-tax revenue, had led to breaching of the fiscal deficit target. D&B expects the fiscal deficit to be at 5.1% during FY14, slightly lower than 5.2% achieved during FY13 but higher than the level of 4.8% budgeted by the government. Though the government might be able to cap the subsidy bill to some extent given the deregulation of the diesel, LPG and petrol, and constrain its expenditure, the targeted increase in revenue realisation might not materialize to the extent budgeted by the government.

126 new products have been added under focus product scheme. Changes in SEZ policy and IT/ ITES parks along with zero duty export promotion capital goods (EPCG) scheme will also help in promoting exports in the forthcoming fiscal year. Macro economic factors like increase in investment, moderation in inflation and recovery in global economic scenario will have a positive impact on Indias export. D&B estimates exports to touch US$ 328 bn in FY14, a growth of around 9% after declining by 1.8% in FY13. In FY13, imports witnessed significant moderation and grew by around 0.4% due to inadequate demand, lack of investment and subdued consumer sentiments. The demand conditions are likely to improve in FY14 with moderation in inflation and revival of investment activities in the second half of FY14. The global commodity prices are witnessing a downward trend for the last few months and it is expected to continue further. Therefore, D&B expects imports to be around US$ 547 bn with growth of 11.3% over previous year and this in turn will lead to a trade deficit of US$ 219 bn in FY14 as compared to US$ 191 bn in FY13. D&B further expects that the surge in service exports will ease the current account deficit. The current account deficit would moderate to 4.8% of the GDP during FY14 as compared to 5.7% estimated for FY13.

External Sector to improve

Source: Ministry of Commerce & Industry, D&B India F: D&B forecast

Diversification of exports market and products will hold the key to growth in exports during FY14. In the recent foreign trade policy the total number of countries under focus market scheme and special focus market scheme has been increased, whereas

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Special Article
Fiscal Consolidation: Need of the Hour
Indias fiscal situation has turned precarious and has become a hurdle in the path of higher growth. Large fiscal deficit has vitiated the overall macroeconomic environment via multiple channels. The persistence of large fiscal deficits has added further upward pressures on interest rates, thereby impeding investment, particularly private investment. The worsening of fiscal situation has also contributed to the fall in Government savings. Finally, higher fiscal deficits have also led to an increase in government borrowing and high debt servicing. Given the adverse impact that high deficit poses on Indias growth prospects, it has become vital to outline a clear roadmap to reduce fiscal deficit. The Government has started undertaking substantial fiscal consolidation to enable public finances on a sounder footing. These include partial deregulation of administered fuel prices, particularly diesel, launching of a direct cash transfer scheme to enhance efficiency of subsidies, transfers and social welfare payments, capping the number of subsidized gas cylinders and tighter curbs on spending. The Budget has reiterated its commitment towards fiscal consolidation. The Budget 2013-14 has estimated a fiscal deficit target of 4.8% of GDP for FY14, lower than the deficit of 5.2% in FY13. The government is relying on higher revenue growth to meet the fiscal deficit target for FY14. The revenue receipts are estimated to expand by 21.2% in FY14, reflecting a 19% and 33% rise in net tax and non- tax revenues, respectively. Expenditure has been budgeted at ` 16,652.97 bn, a 16.4% increase as compared to the revised estimates (RE) of FY13. Non plan revenue expenditure is expected to rise by a modest 8% in FY14, lower than the 13.3% growth in FY13 (RE). The question that arises is, would the measures of fiscal consolidation proposed in the budget stimulate investment and growth. Looking back at the history of fiscal imbalance, the best years of fiscal prudence was achieved during the period between FY05 FY08.

Source: RBI, Union Budget 2013-14

The improvement in Central Government finances was the outcome of a confluence of factors; the period was marked by high economic growth and the resultant increase in tax revenue as well as major tax administration and tax structure reforms at the central level. The tax-GDP ratio improved and reached a peak of 11.9% in FY08. Total expenditure as a proportion of GDP was brought down from 15.4% in FY05 to 13.6% in FY07. Subsidy as a percentage of GDP remained more or less stagnant during the high growth phase. Fiscal consolidation in the high growth phase was primarily achieved through higher revenue growth. However, the current scenario is that of declining GDP growth and bleak investment activity, thereby raising fears that the fiscal targets would be breached substantially.

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Concerns arise on whether the government would be able to generate the requisite revenue to finance the total expenditure laid out in the budget. If revenue generation falters owing to failure of revival of economic growth or due to difficulties in implementing the revenue generating measures, either fiscal consolidation will have to be foregone or expenditure will need to be curtailed. Achieving the fiscal deficit target is further reliant on containing the subsidy bill at ` 2.3 trillion in FY14. Subsidy expenditure is budgeted to decrease by 10.3% in FY14 relative to FY13 RE. This target looks very optimistic and would primarily depend on the petroleum subsidy bill (budgeted to decline by 33% in FY14 relative to FY13 RE).

A major issue at the present juncture is to make credible progress towards fiscal consolidation. Even as achieving these targets assumes priority, the path of fiscal adjustment is equally important as the target. While, a lot would depend upon a host of macroeconomic factors, implementation of key reforms such as GST can push growth and expand the tax base and contribute significantly to higher revenues. Focus on expenditure-related reforms also holds the key to this path. The Government needs to focus on measures to contain growth of revenue expenditure and commit more resources towards capital expenditure. This would help ease some structural bottlenecks that contribute to supply-side inflationary pressures.

Source: RBI BE- Budget Estimates

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Some Concerns to Growth

Indias economy is at an edge, with growth trending below the potential level and economic fundamentals remain weak and structural problems persist because of lack of adequate economic reforms since 2004. Although we expect Indias GDP growth to recover during FY14, at a much slower pace, the process of recovery might get derailed as there are several risks which poses downside risks to the revival in the economic growth. Euro zone remains mired in recession, with Cyprus being the new country to be embroiled in the debt crisis. Prolonged non-resolution of the debt crisis in the Euro region and deferral in the recovery process of the US economy coupled with slowing down of the emerging countries would impede India growth momentum If monsoon turns out to be below normal, not only agricultural growth would be impacted, the resultant increase in food prices would lead to higher WPI inflation. Any shocks to oil prices could stroke upward pressure to headline inflation and deteriorate current account deficit. Continuation of the reform measures is important and lack of proper implementation of the reforms could be a drag to the revival in the industrial growth. Non revival in corporate investment and infrastructure building and further decline in FDI inflows could be a major hindrance to the resumption in the industrial activity. Continuation of the fiscal consolidation initiated by the government will be a major boost to the overall growth, failure of which might hinder recovery in private investment demand Political uncertainty owing to the outcome of the election process could disrupt the reform process

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D&B's Key Macroeconomic Forecast

Variables Nominal GDP (` Bn) Nominal GDP Growth (YOY%) Real GDP (` Bn) Real GDP Growth (YOY%) Population (Mn) GDP Per Capita ` Agriculture (` Bn) Agriculture Growth (YOY%) Industry (` Bn) Industry Growth (YOY%) Services (` Bn) Services Growth (YOY%) Sectoral Share (%) Agriculture Industry Services IIP (YOY%) Private Fixed Consumption Expenditure (PFCE) Constant (YOY%) Savings Rate % to GDP Investment Rate % to GDP WPI- All Comm WPI-Manuf CPI-IW 15-91 days' Treasury Bill (yield) 10 Year G-Sec (yield) M3 (Growth Rate %) Bank Credit (Growth Rate %) Exchange Rate (USD/INR) (End Period) Exchange Rate (USD/INR) (Average) Exports (US $ Bn) Exports (Y-O-Y Growth) Imports (US $ Bn) Imports (Y-O-Y Growth) Trade Balance (US $ Bn) Current Account Balance % of GDP Fiscal Deficit Note: E - D&B Estimates; F - D&B Forecast * are the acutal numbers 2007-08 49871 16.1 38966 9.3 1138 34241 6551 5.8 11200 9.7 21216 10.3 16.8 28.7 54.4 15.5 9.4 36.8 38.1 2008-09 2009-10 Real Sector 56301 64778 12.9 15.1 41587 45161 6.7 8.6 1154 1170 36037 38599 6557 6610 0.1 0.8 11697 12769 4.4 9.2 23333 25782 10.0 10.5 15.8 28.1 56.1 2.5 7.2 14.6 28.3 57.1 5.3 7.4 2010-11 77953 20.3 49370 9.3 1186 41627 7135 7.9 13939 9.2 28297 9.8 14.5 28.2 57.3 8.2 8.6 2011-12 2012-13 (E) 2013-14 (F) 89749 15.1 52436 6.2 1202 43624 7395 3.6 14425 3.5 30616 8.2 14.1 27.5 58.4 2.9 8.0 30.8 35.0 8.9 7.3 8.4 8.94 8.45 13.2 17.0 51.16 47.92 306.0 21.8 489.3 32.3 -183.4 -4.2 5.7 100833 12.4 55058 5.0 1217 45240 7535 1.9 14872 3.1 32667 6.7 13.7 27.0 59.3 1.2 4.0 29.2 34.9 7.4* 5.4* 9.9 8.08* 8.04* 13.3* 14.7* 54.39* 54.45* 300.6* -1.8* 491.5* 0.4* -190.9* -5.7 5.2 113135 12.2 58636 6.5 1232 47587 7792 3.4 15586 4.8 35248 7.9 13.3 26.6 60.1 3.7 6.4 30.3 35.1 5.7 5.0 8.2 7.50 7.70 15.5 17.0 52.50 53.37 328.0 9.1 547.0 11.3 -219.1 -4.8 5.1

32.0 33.7 34.0 34.3 36.5 36.8 Inflation Rate (Average %) 4.7 8.1 3.8 9.6 4.8 6.2 2.2 5.7 6.2 9.1 12.4 10.4 Monetary (End Period) 7.00 4.55 3.93 7.14 7.64 7.04 7.83 8.02 21.4 19.3 16.9 16.1 22.3 17.5 16.9 21.5 External Sector 39.99 50.95 45.14 44.65 40.24 45.92 47.42 45.58 162.9 185.3 178.8 251.1 28.9 13.7 -3.5 40.5 251.4 303.7 288.4 369.8 35.4 20.8 -5.0 28.2 -88.5 -118.4 -109.6 -118.6 -1.3 -2.3 -2.8 -2.7 Public Finance 2.5 6.0 6.5 4.8

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