Much of FY14's growth depends on normal monsoons
Of all the forecasts made for economic growth in FY14, perhaps the most bullish is that made by credit rating firm Crisil which is looking at a 6.7% base case number. HSBC, by contrast has just cut its FY14 forecast from 6.9% to 6.2%; Citi is looking at a 6.2% and CLSA at an even lower 6%. While the Crisil forecast looks wildly optimistic, even after you account for the base effect of this year’s poor growth, all forecasts by analysts are predicated on a normal monsoon since it is this that will fuel consumption which, in turn, will boost industry. While Crisil is looking at a 3.5% agriculture growth number, Citi is looking at 3%—that is, a reversal to trend. This year’s poor monsoon took agriculture growth to a mere 0.6%. Crisil estimates 60% of incremental GDP will come from agriculture growth—while that number is different across analysts, all agree the bulk of the growth impetus will come from this sector. What makes Crisil’s forecast more interesting is the twist it has given to the 2014 elections and the impact of a likely pick-up in government spending as a result—40% of incremental growth in FY14, it says, will accrue from increased government spending, the impact of a cut in interest rates, and a modest recovery in exports.
Apart from agriculture, the other key variable is the rupee. While Crisil has stuck its neck out with a March FY14 forecast of R52 to the dollar, Citi is looking at 53.5 and CLSA at 56. How strong foreign inflows are will continue to be key to the rupee but it's worth keeping in mind that despite very healthy flows—FDI was $5bn higher in Q2 q-o-q and FII $9.5 bn—the rupee continued to remain under pressure. Equally worrying is that gold is no longer the reason behind the sharp deterioration in the current account—exports fell $6.9 bn between Q1 and Q2 while gold imports rose $1.4 bn. Worse, repatriation of profits and repayments-cum-interest on ECBs have risen sharply, not surprising given the sharp rise in the stock of ECBs over the last few years. In other words, a volatile FY14 is certainly on the cards.