GDP growth seen at 6% in FY15: CRISIL

Q4FY14 failed to see any revival in industry and services, and GDP growth was in fact lower in the second half of FY14 at 4.6%, compared to 4.9% in the first half of FY14.

June 02, 2014 9:57 IST | India Infoline News Service
India’s GDP growth for FY14 came in at 4.7%. This is lower than the government’s advance estimate of 4.9% growth and only slightly above 4.5% growth in FY13. Q4FY14 failed to see any revival in industry and services, and GDP growth was in fact lower in the second half of FY14 at 4.6%, compared to 4.9% in the first half of FY14. Financial / business services and agriculture drove growth in FY14 while manufacturing continued to be a laggard. Of late, there has also been an uptick in mining and utilities (due to higher electricity production). On the demand side, net exports contributed to more than half of GDP growth because of a fall in imports and an increase in exports

The decisive mandate in the just concluded general election has bolstered investor confidence and raised expectations of fast paced decision-making and economic reforms. Ensuring a sustained, healthy pace of growth will, however, require much more. The government’s top priority now should be to revive the economy by improving the business climate (through a swift resolution of issues bedevilling iron ore and coal mining, among others) and fast-tracking the project pipeline through greater clarity on land acquisition and speedier environmental clearances. To improve and fulfil India’s long-term growth potential, it is equally imperative for the government to exercise fiscal discipline, lower inflation, improve bank asset quality and revive manufacturing. Some of these steps can revive sentiments in the short term but will significantly impact growth in the medium term In FY15, under the assumption of normal monsoon, we expect GDP growth to rise to 6%. This will be led by higher industrial growth driven by infrastructure projects, many of which were cleared last year. But if monsoons fail – the Indian Meteorological Department has assigned 60% chance of El Nino phenomenon occurring this year - GDP growth could be lower, at 5.2%.

Where is growth looking up?

Agriculture: A good monsoon pushed agriculture growth to 4.7% in FY14; total foodgrain production rose nearly 3%. However, current climate forecasts indicate increased likelihood of a deficient monsoon in FY15 that could affect agriculture production.

Financial, insurance, real estate and business services: This sector contributed more than half of the overall GDP growth in FY14 although, in terms of size, it is only 20% of the economy. It grew by 13% on the back of a rise in business services exports and aided by a pick-up in bank deposit and lending growth in H2FY14 (following a surge in non-resident deposits). Improving global prospects could continue to favour this sector in FY15.

Electricity: Electricity production rose to 961.5 billion units (BU) in FY14 from 907.2 BU in FY13 mainly on account of capacity additions (nearly 38 GW) over the past 2 years. CRISIL Research expects electricity production to grow by 4-5% in FY15 due to capacity additions (around 11 GW) as well as a marginal increase in PLFs led by an improvement in coal supply.

Mining: The sector has gathered pace in recent months; fall in output was lower at 0.8% in H2FY14 compared to 2% in H1FY14. Mining output is expected to pick up in the coming quarters due to the lifting of the regulatory ban on mining in Karnataka and Goa. Prior to the mining ban, these two states accounted for 4-5% of the country’s mining output. Mining ban in other major mining states with significant share in the country’s output – Andhra Pradesh and Chhattisgarh (about 13% each), Odisha (10%), and Gujarat and Madhya Pradesh (about 8% each) – is still awaiting resolution. Fast-tracking decisions in this sector will immensely benefit these states and improve the overall availability of mineral resources.

Net exports: A 2.5% fall in imports and 8.4% growth in exports improved the net export position and contributed 54% to overall growth in FY14. Although the continued global recovery will support growth in exports, the net export position will be less favourable in FY15 as imports will pick up gradually in line with domestic growth.

Where is growth still lagging?

Trade, hotels, transport and communication: Accounting for nearly 27% of the economy, this sector is almost entirely driven by demand from the private sector and has been facing the wrath of declining consumption and investment demand as well as the spillover effects of sulking industrial growth. In FY14, the segment grew by 3% compared to 5.1% in FY13 however growth saw some revival in the second half of FY14.

Manufacturing: The sector, which is 16% of the economy, continued to suffer as output fell 0.7% in FY14 as the impact of weak domestic demand outweighed the benefit from rising exports. Private consumption growth was higher in the H2FY14 possibly reflecting better farm incomes, but growth for the full year was low at 4.8%. High inflation and weak income prospects dented consumer sentiments. Investment growth fell by 0.4% in H2FY14 and for the full year remained flat. Investment rate therefore fell to 32.3% in FY14 from 33.9% in FY13. An improvement in investment efficiency is critical to encourage fresh investments and drive growth.

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