A lot of data releases came through last week, some good some not-so-good, which will determine policy action as well as market sentiment in the near term:
- FY13 GDP growth revised lower: The government revised lower FY13 GDP growth to 4.5% from 5.0% earlier. The downward revision was owing to:
(1) lower growth in the agriculture, mining, electricity and construction sectors; and
(2) an upward revision in FY12 GDP growth to 6.7% from 6.2%.
The silver lining in the downward revision is of course that it will provide positive base effect for FY’14 GDP growth numbers (advance estimate expected out in the coming week).
- Fiscal deficit reached 95% of the full year target in the first nine months: This is the result of both lower than targeted revenues as well as lack of spending cuts on the part of the government. Given the Finance Minister’s seriousness in meeting the full year fiscal deficit target of 4.8%, a sharp cut-back in government expenditure can be expected. This austerity will doubtless have an impact on growth in the last quarter of FY14. Demand for higher dividends from PSUs and divestments remain viable options for the government.
- Core infrastructure sector growth higher in Dec: Core infrastructure sector, which has a substantial weight in industrial production, grew 2.1% in December from 1.7% in November. Electricity output expanded at its fastest pace, while coal, natural gas and refinery product output growth contracted.
Growth concerns going forward:
- Fading effect of good monsoons in 2013
- End of festive season boost (Oct to Jan)
- Food inflation continues to remain high and continued high rural wages in an election year will also keep inflation concerns alive
- Continued higher borrowing costs: adoption of Urjit Patel Committee Report by RBI sets a CPI target of 8-8.5% in coming year, above which, interest rates will continue to rise
- Trade balance: After a much needed contraction, the trade deficit has begun to widen again as exports contract. Some succour is provided by plummeting imports, but this in turn can be viewed as a sign of waning growth/demand
- Delayed capex (Government and private sector) due to focus on elections
- External sector risks: Deficit and currency situation could get compounded by the QE taper
To end on a positive note, some key plusses going forward:
- Agricultural output remains strong, providing a boost to rural demand and keeping food prices under some degree of control
- Potential for pick-up in exports due to improving US and European growth prospects as well as renewed competitiveness due to weaker INR
- Project clearances have picked up pace as the UPA Government gets into damage control / image restoration mode.
Mostly, it will be overhang from the unexpected policy rate hike by RBI and impact of QE taper on FII flows that will determine market movement in the absence of tangible good news on the macro front.