YEARS

MAKING MA RK

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CTION BE TT FUN ER

August 2012

CRISIL Insight

10

9

8
8.0

7

Inflation

6

Growth
5.5

5 FY 11 FY 12

FY 13

India: Macroeconomic Outlook Revision 2012-13

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0 per cent from 7. Given the worsening of the Euro zone economy as well as domestic growth slowdown. CRISIL Research has revised up its average WPI inflation forecast for 2012-13 to 8. The rupee is now expected to settle around 53 per US$ by March-2013 compared to our earlier forecast of 50 per US$.0 per cent to reflect the adverse impact of deficient monsoon on food inflation.2 percent of GDP in 2012-13 from our earlier estimate of 5. ▪ ▪ ▪ ▪ ▪ ▪ 1 . we now expect the Indian economy to attract lower foreign capital inflows compared to our earlier estimate. We now expect the fiscal deficit to worsen to 6.India: Macroeconomic Outlook Revision 2012-13 Key Messages ▪ CRISIL Research has cut India’s real GDP growth forecast for 2012-13 to 5. If it does so. Similarly high inflation will tie the hands of the Reserve Bank of India (RBI) in aggressively cutting rates to stimulate the economy.0 per cent released earlier. land acquisition and speedy clearance of projects can create upside to the growth projection. Swift policy action to solve issues related to mining.8 per cent. The revised growth forecast assumes that the stretched fiscal situation will limit the ability of the government to give a generous stimulus to the economy. then growth will go up but so will fiscal deficit. The downward revision in India’s growth forecast factors in the adverse impact of rainfall deficiency (an expected deficiency of 15 per cent for June-September 2012. Despite slowing growth.5 per cent from its earlier forecast of 6. In case of a substantial fiscal stimulus to the economy. as per Indian Meteorological Department) and worsening of the Euro zone growth outlook (a revision in 2012 growth forecast to -0. The average WPI inflation forecast has been raised to 8. the fiscal deficit to GDP ratio could worsen further. The increase in the fiscal deficit to GDP ratio largely reflects lower revenue growth as a result of slowing GDP growth.5 per cent.6 per cent by Standard & Poor’s relative to the earlier forecast of ‘zero’ per cent).

9 6.6 7. two key risks to the economy have emerged: First.0 3. but will also adversely influence the rabi crop.yr G-Sec (March-end) Re/US$ (March end) 2.0 8.5 7.0-8. agriculture GDP would not grow this year and would record ‘zero’ per cent growth compared to our earlier estimate of 3 per cent under the assumption of normal monsoon.5 per cent.5 per cent. RBI.2 Source: Central Statistical Organisation (CSO).2 50.8 51. We now forecast India’s real GDP growth in 2012-13 at 5.6 5.0 8. 2012 Euro zone growth in 2012 at -0.5 9. which is the worst-case scenario projected for the Euro zone by S&P. rainfall for the south-west monsoon season is likely to be around 15 per cent deficient close to 20 per cent deficiency recorded in June-July.0 8. Even if there is a partial recovery in rainfall in the coming weeks. Budget documents. The revised growth forecast for India does not take into account any substantial fiscal stimulus that may be provided to the economy to arrest and reverse a growth slowdown. Table 1 – India economic outlook 2012-13 2012-13 2011-12 Actual Agriculture GDP Growth Industry Services Total Inflation Interest rate Exchange rate WPI – Average 10. This will hurt India’s exports and capital inflows further.0 8.5 8.CRISIL Insight India: Macroeconomic Outlook Revision 2012-13 After we revised India’s macroeconomic forecast for 2012-13 in June. Upside to growth can also arise from sorting out policy-related issues in mining and power sectors. In contrast. A deeper recession in the Euro zone in 2012 with the region’s economy shrinking by 1.2 53.6 per cent. As a result. and CRISIL Research According to the IMD. Our forecast assumes – ▪ ▪ Monsoon deficiency at 15 per cent for the full south west monsoon season (June-September) as indicated by Indian Meteorological Department (IMD) on August 2. worsening of the Euro zone economic outlook.8 3.4 8. second.2 Forecast released in Jun-12 3.1 6.8 6. the key downside risks to the revised growth outlook arise from – ▪ ▪ Monsoons deficiency of more than 15 per cent for the full season as indicated by IMD. agricultural production could be hit much harder. a percentage point lower than our June estimate of 6. A fiscal stimulus may create some upside to industrial and services growth. Ministry of Finance.0 Aug-12 0. an overall deficiency of 15 per cent would imply that 2012-13 will end up as a drought year and will result in a substantially lower sowing not only in the kharif season. the deficient monsoon.7 5. In that case.0 5. which is Standard & Poor’s (S&P) revised forecast compared to its earlier forecast of ‘zero’ per cent.0 per cent.0 Fiscal deficit % of GDP 5.0-8. 2 .

June 2012).5 9.8 0. Table 2: Real GDP growth (year-on-year%) Agriculture 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13F Note: F – CRISIL Forecast Source: Central Statistical Organisation 4. will experience a slowdown (for details see India’s Euro Connection: Growth Scenarios.000 crores in addition to other stimulus measures such as extension of Mahatma Gandhi National Rural Employment Guarantee Scheme to the entire rural India.0 Industry Services 12. implies that India’s IT/ITES sector. India’s merchandise exports (clothing. including a recession-hit UK. swift policy action on issues related to mining. with 200910 being an all-India drought year and agriculture growth for two years averaging at 0.6 9. the hit to agriculture at a national level on the basis of the rainfall pattern till date is almost as bad as in 2009 (Box 1.6 10.5 percent for 2012-13. increases in wages of public sector employees through implementation of Sixth Pay Commission also took place in these two years.0 7. rainfall was deficient.2 9. land acquisition and speedy clearances of projects can create some upside to our growth projection of 5. a monsoon failure resulting in a severe drought accounts for a downward revision of around 0.2 5. CRISIL Insight. While the government has began to announce drought-relief measures. our forecast takes into account the worsening of the Euro zone economy. During 2008-09 and 2009-10. and Monsoons – 2009 situation yet again? CRISIL Insight. According to CRISIL Research’s Deficient Rainfall Impact Parameter (DRIP).3 6. agriculture production this year could even be lower than last year.8 0.4 8.6 GDP 9. During these years.4 8.7 4.6 per cent in 2012 compared with the previous forecast of ‘zero’ per cent growth.1 10.5 5.0 10.Depending on the quantum of rainfall deficiency and its distribution. which will become clearer towards the end of the monsoon season.3 8. In addition.0 2. The weak performance of agriculture will rub off on industry and services given the inter-linkages among them. we do not envisage a large fiscal stimulus in 2012-13 similar to 2008-09 and 2009-10 given the strain on central government’s finances.4 3. Overall.9 7. the Euro zone economy will shrink by 0.0 percent. The above forecasts do not take into account a substantial fiscal stimulus that might be provided to the economy as growth slips below 6. The deterioration in the economic outlook for Europe.4 7. the government had announced farm loan waivers in excess of Rs 40.3 10. iron & steel. electronics and gems & jewellery) too will decelerate further (Euro zone accounts for 15 per cent of India’s total exports). which exports around 20-25 per cent of its exports to the region. According to S&P’s revised forecast. July 2012).6 per cent (Table 2). and indirect tax cuts.5 3 . On the global front.7 8.2 3. However.7 percent out of a total downward revision of 1 percentage point to India’s growth forecast.1 1.4 6.

0 per cent to reflect the higher-than-anticipated increase in food inflation.8 per cent of GDP. commodity and metal prices. consequently. 2) Over 400 bps growth rate differential that India will maintain with the West. land acquisition and environmental clearances. On the flip side.0 per cent. The flaring up of food inflation will. Boosting investor confidence in the government’s resolve to tackle both short-term and long-term challenges to sustain growth. core inflation. both monetary and fiscal policies are constrained to revive growth in the immediate run. However. It will also be critical to raise the administered fuel prices to reduce subsidies and create fiscal room for expenditure related to drought-relief measures. The rupee’s appreciation against the dollar from current levels to around 53 per US$ by March-end 2013 would be supported by easing of the current account deficit in 2012-13 to nearly 3. We expect the yield at around 8.2 per cent by March-end 2013. from 3. especially demonstrating its ability to push through key reforms related to land. should continue to remain below 5. however. despite growth slowdown. The upside risks to inflation and limited ability of lower interest rates in propping up growth implies lower room for monetary loosening. taxation and government expenditure. and speedy clearance of projects. As a result. a potential revision in electricity tariffs.2 per cent from the earlier forecast of 5.6 per cent estimated earlier. labour. Lower import growth compared to our earlier assumption. lower GDP growth in both India and the Euro zone will result in a decline in manufacturing inflation. India would continue to remain attractive to foreign investors due to – 1) Attractive valuations of Indian equity markets because of the sharp rupee depreciation and correction in equity prices. would hold the key to raising India’s growth prospects over the medium run. Our inflation forecast assumes around 8-10 per cent pass-through of international crude oil prices into domestic retail fuel prices. raise inflationary pressure. WPI inflation forecast has been revised up to 8. which pushes our fiscal deficit forecast to 6. a weak rupee will continue to offset the gains from lower global crude oil. the pressure on the 10-year G-sec yield would remain high. Also. At the current juncture. even if the repo rate is cut by further 75-100 basis points by the RBI in the rest of the fiscal year. With lower pricing power of corporates.1 per cent of GDP. and keep the cost of imported items high. higher government borrowings.0-8. Despite a slight worsening of the Euro zone situation.CRISIL Insight Although the growth forecast has been revised downward. Given the higher fiscal deficit and. we now expect the Indian economy to attract less foreign capital inflows than expected earlier. due to a fall in India’s GDP growth as well as softening of international oil prices. 4 . given the worsening of global and domestic growth outlook. we now expect rupee to settle around 53 per US$ by March-end 2013 compared to our earlier forecast of Rs 50 per US$. With lower GDP growth. The fiscal policy can create some upside to our projected growth scenario by 1) boosting investment expenditure 2) swift policy action to solve issues related to mining. reflected in both nonfood manufacturing inflation and CRISIL Core Inflation Indicator (CCII). government revenue growth too will be lower than estimated earlier. Manufacturing inflation will remain low due to moderating demand-side pressures on inflation arising from the slowdown in growth. and an increase in diesel prices. Factors that will maintain upward pressure on inflation include the increase in minimum support price for food crops. would reduce the import bill. This deficit forecast does not take into account any substantial stimulus that may be given to the economy to boost growth.

DRIP is based on the premise that both the availability of irrigation and the level of precipitation affect crop production. and Punjab.0 -5. as against the same period in the previous year). Rainfall deficiency is over 10 per cent in most of the major states. respectively.0 0. As of August 1.3 -19. 2012. Figure 1: Overall rainfall deviation as of July-end (% from normal) 5.0 2007 2008 2009 2010 2011 2012 Source: Indian Meteorological Department CRISIL Research measures the impact of deficient rainfall on agriculture output through Deficient Rainfall Impact Parameter (DRIP) that was developed in 2002. DRIP is a better indicator than percentage deviation of rainfall from normal.2 -1.8 -6.5 per cent below normal rainfall. 2012.0 -20.4 -19. 66.0 3.0 -25. DRIP scores show that the impact of the deficient monsoon so far this year on foodgrain output will be similar to what it was during the 2009 drought. The DRIP scores are also highly correlated with agriculture growth (Figure 2) This year.Box 1: Relationship between rainfall.an all-India drought year (Figure 1). Continued… 5 .0 -10. These two variables are combined to compute DRIP in the following way: %UNIRRij x %DEFj DRIP = ----------------------100 where %UNIRRij: Percentage of un-irrigated area under crop i for state j %DEFj : Percentage deviation of actual rainfall from normal for state j The higher the value of the DRIP Index. DRIP and agriculture GDP As per the long-range forecast provided by the IMD for the second half (August-September) of the south west monsoon season.0 -15. Gujarat. as on July 27.0 per cent below normal is similar to the levels in 2009 .6 per cent and 66.8 per cent). This has affected sowing of the kharif crop (down by around 10 per cent. States with high rainfall deficiency include Haryana. as it captures the deficiency of rainfall (measured as deviation from normal) as well as the vulnerability of a region (measured as percentage of un-irrigated area).4 -2. the greater is the (adverse) impact of deficient rainfall.0 per cent. India is expected to receive 91 per cent of the normal rainfall (with an error of +/. the deficiency in rainfall in June-July is 19 per cent. which have received 71. the rainfall deficiency at 19.

Maharashtra.CRISIL Insight Figure 2: Food grain DRIP score as of July-end and Agricultural Growth Food Grain DRIP 14. jowar. and maize.0 12.0 0. groundnut. Agricultural GDP growth rates are for the fiscal years. The worst-affected crops are bajra.0 6. 6 .0 2. Expected agriculture growth for FY13 Source: Central Statistical Organisation. Karnataka. CRISIL Research According to the DRIP scores calculated using rainfall data available till August 1. deficient rainfall has adversely impacted Gujarat. tur.0 4.0 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 Real Agricultural GDP growth Note: DRIP scores are as of July end. and Haryana. 2012.0 8. Rajasthan.0 10.

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