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VII. Macroeconomic Outlook
Date : Feb 11, 2014

Various surveys indicate that business confidence has started to rebuild, though it still stays weak. Growth in 2013-14 is likely to be somewhat weaker than the earlier projection as signs of pick up are yet to emerge. Improved confidence and actions to support infrastructure projects could translate into a slow-paced recovery in 2014-15 provided these actions are sustained. Inflation has exhibited marked moderation in December and may soften further in Q4 but upside risks remain for 2014-15. The persistence in high inflation continues to pose a challenge to growth over the medium-term, even as its fallout in terms of a wide CAD, on the back of lower savings, has been contained through policy responses over Q3 of 2013-14.

Surveys show business confidence has improved

VII.1 Business confidence has turned around as indicated by a sharp q-o-q growth in various business indices (Table VII.1). These surveys indicate that better investment prospects, improving sales, new orders and improved export performance have contributed to rising optimism. However, weak demand, political uncertainty and high inflation appear to be among the factors restraining growing optimism. The seasonally adjusted HSBC Markit Purchasing Managers’ Index (PMI) for services continued to be in contraction mode in December 2013, while that for manufacturing showed marginal expansion in activity.

Table VII.1: Expectations surveys show improvement

Business expectations surveys

Period Index

NCAER- Business Confidence Index Jan 2014

FICCI Overall Business Confidence Index Q2:2013-14

Dun & Bradstreet Business Optimism Index Q1:2014

CII Business Confidence Index Q3:2013-14

1

2

3

4

5

Current level of the Index

122.3

59.3

157.2

54.9

Index as per previous survey

100.4

49.0

134.9

45.7

Index level one year back

119.7

62.4

146.8

49.9

% change (q-on-q) sequential

21.8

21.0

16.6

20.1

% change (y-on-y)

2.2

-5.0

7.1

10.0

Industrial Outlook Survey reflects marginal recovery in business outlook

VII.2 The Reserve Bank’s 64th round of the Industrial Outlook Survey (http://www.rbi.org.in/IOS64) conducted during November- December 2013, showed that in terms of assessment, the Business Expectation Index (BEI) improved marginally for Q3 of 2013-14, but still remained below the threshold level of 100 separating contraction from expansion. Based on expectations, the index showed an improvement in Q4 of 2013-14 over the previous quarter (Chart VII.1).

VII.3 An analysis of the net responses for various components of demand conditions shows marginal improvement in sentiments regarding production, order books, capacity utilisation, exports and imports for Q3 of 2013-14. The demand outlook for Q4 of 2013-14 shows improved optimism as well. Perceptions on overall financial situation were also better for Q4 of 2013-14 (Table VII.2).

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Table VII.2 Business confidence rises

Reserve Bank’s Industrial Outlook Survey

Parameter

Optimistic Response

Net Response#

October- December

January- March

April- June

July- September

October- December

January- March

2012

2013

2013

2013

2013

2014

E

A

E

A

E

A

E

A

E

A

E

1

2

3

4

5

6

7

8

9

10

11

12

13

1. Overall Business Situation

Better

32.2

17.2

37.5

18.4

29.6

12.8

30.0

7.4

25.7

9.6

31.5

2. Overall Financial Situation

Better

25.8

12.7

27.0

11.8

21.9

9.5

24.1

1.8

17.3

6.4

23.5

3. Production

Increase

35.7

18.6

37.1

18.6

24.4

9.8

28.5

10.8

28.9

11.5

32.1

4. Order Books

Increase

30.3

12.9

29.8

14.0

22.3

9.7

25.3

5.5

21.0

7.0

27.6

5. Capacity Utilisation

Increase

20.0

5.7

21.7

7.8

11.7

2.3

15.9

0.0

14.2

1.3

16.3

6. Exports

Increase

18.0

9.3

18.4

10.8

16.7

8.6

18.6

7.8

16.5

10.9

19.5

7. Imports

Increase

14.0

8.8

13.5

8.3

11.9

8.0

11.2

3.6

7.7

7.0

13.4

8. Employment in the Company

Increase

13.3

6.7

10.3

5.5

8.0

3.2

7.7

-0.2

4.5

0.4

7.0

9. Availability of Finance (from internal accruals)*

Improve

 

 

 

12.1

18.7

10.8

17.2

3.1

14.0

7.6

18.4

10. Availability of Finance (from banks and other  sources)*

Improve

 

 

 

13.4

15.3

12.1

15.2

3.9

12.0

8.7

14.2

11. Availability of Finance (from overseas )*

Improve

 

 

 

3.4

6.3

5.0

7.0

-0.1

2.9

3.9

8.1

12. Cost of External Finance

Decrease

-20.6

-24.4

-18.1

-17.6

-14.3

-14.5

-12.4

-32.7

-28.3

-32.0

-26.7

13. Cost of Raw Material

Decrease

-48.6

-50.7

-45.0

-53.5

-45.6

-49.9

-43.4

-62.2

-51.5

-55.3

-46.3

14. Selling Price

Increase

17.3

10.2

15.8

9.1

14.9

7.3

12.1

11.3

13.9

7.8

15.1

15. Profit Margin

Increase

-1.3

-16.7

-2.0

-15.3

-4.9

-18.4

-3.7

-24.1

-9.3

-22.4

-4.0

#: Net response is the percentage difference between the optimistic (positive) and pessimistic (negative) responses; responses indicating status quo (no change) are not reckoned. Higher ‘net response’ indicates higher level of optimism and vice versa.
E: Expectations. A: Assessment.
*: These questions are newly added by splitting the question on Availability of Finance (both internal and external sources) in the 61st Round (Jan-March 2013).

Consumer confidence shows signs of improvement

VII.4 The Reserve Bank’s 15th round of the Consumer Confidence Survey (http://www.rbi.org.in/CCS15) conducted in December 2013 shows improvement in consumer confidence as indicated by the Current Situation Index (CSI) and Future Expectations Index (FEI) (Chart VII.2).

Downward revision in India’s growth projections by external agencies

VII.5 Various external agencies have reduced India’s growth projections further. However, the World Bank and the IMF revised it moderately upwards (Table VII.3). The IMF projects India’s 2014-15 growth at 5.4 per cent, while the World Bank places its forecast at 6.2 per cent.

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Table VII.3: Growth projections revised downwards

Agencies' projections for 2013-14

Agency

Latest Projection

Earlier Projection

GDP Growth (Per cent)

Month/Year

GDP Growth (Per cent)

Month/Year

1

2

3

4

5

Finance Ministry

5.0-5.5

Sept. 2013

6.1-6.7

Feb. 2013

PMEAC

5.3

Sept. 2013

6.4

Apr. 2013

IMF*

4.6

Jan. 2014

4.3

Oct. 2013

World Bank

4.8

Jan. 2014

4.7

Oct. 2013

OECD**

3.4

Nov. 2013

5.3

May. 2013

ADB

4.7

Dec. 2013

4.7

Oct. 2013

NCAER

4.8-5.3

Nov. 2013

5.9

Aug. 2013

*: IMF’s projection in factor cost corresponding to 4.4 per cent in market prices.
**: GDP at market prices.

Survey shows professional forecasters expect modest recovery in 2014-151

VII.6 The Reserve Bank’s 26th round of the Survey of Professional Forecasters outside the Reserve Bank (http://www.rbi.org.in/SPF26) indicated growth bottoming out in 2013- 14, and a modest recovery in 2014-15 with growth pegged at 5.6 per cent. CPI inflation is expected to exhibit persistence and decline slowly averaging 8.9 in Q2 of 2014-15 and average 8.5 per cent for the full year. Growth expectations for 2013-14 have remained unchanged, while expected WPI inflation is higher. There has been a significant downward revision in the forecast for CAD for 2013-14 to 2.7 per cent from 3.5 per cent forecasted earlier (Table VII.4).

Table VII.4: Forecasters outside the Reserve Bank expect modest growth recovery
and inflation persistence in 2014-15

Median forecasts of select macroeconomic indicators by professional forecasters 2013-14 and 2014-15

 

Actual 2012- 13

Annual forecasts

Quarterly Forecast

2013-14

2014-15

2013-14

2014-15

Q3

Q4

Q1

Q2

Q3

E

L

E

L

E

L

E

L

E

L

E

L

E

L

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

1. Real GDP growth rate at factor cost (%)

5.0

4.8

4.8

5.8

5.6

5.0

5.0

5.0

5.2

5.6

5.3

5.8

5.6

-

5.6

a. Agriculture and Allied Activities

1.9

3.7

4.1

3.0

2.9

4.1

5.0

4.4

4.8

3.0

3.4

3.0

3.0

-

3.0

b. Industry

1.2

1.3

1.5

3.8

3.6

1.4

1.5

2.1

2.0

3.4

3.0

3.3

3.2

-

3.7

c. Services

6.8

6.2

6.2

7.0

7.0

6.5

6.2

6.5

6.3

6.9

6.5

7.0

6.8

-

7.2

2. Gross Domestic Saving (% of GDP at current market price)

-

30.0

30.5

31.0

31.0

-

-

-

-

-

-

-

-

-

-

3. Average WPI-Inflation

7.4

6.0

6.4

5.5

6.0

6.5

-

6.5

6.6

6.5

6.8

5.8

6.0

-

5.5

4. Average CPI-Combined Inflation*

10.2

-

9.9

-

8.5

-

 

-

9.7

-

9.5

-

8.9

-

8.0

5. Exchange Rate (`/US$ end period)

54.4

-

-

-

-

62.0

-

60.8

61.9

60.9

61.5

61.0

61.5

-

61.0

6. YTM of Central Govt. Securities with term to maturity of 10-years (%-end period)

8.0

8.3

8.5

7.9

8.1

-

-

-

-

-

-

-

-

-

-

7. Merchandise Export (growth rate in %)!

-1.0

3.8

6.3

8.9

8.9

-

-

-

-

-

-

-

-

-

-

8. Merchandise Import (growth rate in %)!

0.5

-1.9

-3.7

6.4

7.6

-

-

-

-

-

-

-

-

-

-

9. Trade Balance (US$ billion)

-195.7

-

-

-

-

-45.6

-36.3

-42.5

-36.9

-46.0

-41.7

-47.6

-38.3

-

-41.6

10. Current Account Deficit (% of GDP)

4.8

3.5

2.7

3.3

2.8

-

-

-

-

-

-

-

-

-

-

11. Central Government Fiscal Deficit (% of GDP)

4.9

5.0

5.0

4.7

4.7

-

-

-

-

-

-

-

-

-

-

E: Previous Round Projection. L: Latest Round Projection. -: Not Available. !: US$ on BoP basis.
*: The forecast for CPI-Combined has been incorporated from 26th round only i.e. the current round.
Note: The latest round refers to 26th round for the quarter ended December 2013, while previous round refers to 25th round for the quarter ended September 2013.
Source: Survey of Professional Forecasters, Third Quarter 2013-14.

Households’ near term inflation expectations go down marginally

VII.7 The latest round (October-December 2013) of Inflation Expectations Survey of Households (IESH Round 34) (http://www.rbi.org.in/IESH34) indicates that the perception of three-month ahead median inflation expectations of households moved down whereas that for the one-year ahead period, remained at the same level as compared to the previous quarter (Chart VII.3).

Growth Outlook: Economy poised for gradual recovery in 2014-15

VII.8 Prospects of a pick-up in real GDP growth in the second half of 2013-14, have been dampened by negative growth in industrial production over two consecutive months, sluggishness in services sector activity and the weakening in private consumption and investment demand. Notwithstanding the improved export performance and buoyant outlook for agricultural production, GDP growth for 2013-14 could be somewhat lower than the central estimate of 5 per cent projected at the time of the Second Quarter Review.

3

VII.9 For 2014-15, the Reserve Bank’s assessment is that a gradual recovery could set in, though further actions will be needed to secure it. The GDP growth is likely to be in the range of 5 to 6 per cent, with risks balanced around the central estimate of 5.5 per cent (Chart VII.4). As projects cleared by the CCI so far translate into investment, global growth outlook improves, and inflation softens, real GDP growth in 2014-15 could turn up into the higher reaches of this forecast range.

4

5

Inflation Outlook: Inflation anticipated to moderate further but remain above comfort zone

VII.10 Retail inflation measured by the CPI is expected to moderate from current levels, driven down by further seasonal softening in vegetables and fruits prices in Q4 of 2013-14. However, CPI excluding food and fuel inflation is expected to remain elevated, imparting persistence to the headline. Accordingly, headline CPI inflation could still remain above 9 per cent in the rest of 2013-14.

VII.11 In 2014-15, a slow paced inflation moderation amidst sticky prices could continue. Based on the assumptions of the normal rainfall, some cost pressures from administered fuel price increases, elevated rural wages, supply chain bottlenecks and still heightened inflation expectations, CPI inflation is expected to range between 7.5 and 8.5 per cent in Q4 of 2014-15, albeit, with the balance of risk tilted to the upside (Chart VII.5).


1 The forecasts reflect the views of professional forecasters and not of the Reserve Bank.


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