The Finance Minister P Chidambaram will present the interim budget for 2014-15 today. The markets have a fair idea of what is to be expected in the budget. Economic growth at 4.9% for fiscal 2013-14, fiscal deficit at 4.65% of GDP and current account deficit at below 3% of GDP. The interim budget by itself will not cause any movements in markets.
The question is, what will the markets do post the budget leading into the 2014 general elections. The widespread belief amongst market participants is that India will see the NDA led by the BJP come into power this year and there is a lot of hope that the new government will take the economy out of the woods. It is a different matter that it's going to take a lot to get the economy out of the woods going by the performance of the economy in fiscal 2013-14. However markets like to live on hope and as that hope gains ground, there will be a tendency to buy into that hope.
The Sensex and Nifty could go back to record highs on expectations of NDA led government at the center while bond yields are likely to stay ranged given worries of borrowing for next year and fiscal year end liquidity conditions. AFP
The Sensex and Nifty are trading at levels of 20,500 and 6070 respectively, having come off by 2% to 3% from highs seen in January 2014. Ten year benchmark government bond yields are trading at levels of 8.82%, up 30bps from lows seen in January 2014. The Rupee is up by about 1.5% from lows against the USD since end January 2014. The Sensex and Nifty could go back to record highs on expectations of NDA led government at the center while bond yields are likely to stay ranged given worries of borrowing for next year and fiscal year end liquidity conditions. The Rupee is likely to strengthen given fall in current account .
The CSO (Central Statistical Office) estimates that the Indian economy will grow by 5.2% in the second half of fiscal 2013-14. The economy has grown by 4.6% in the first half and full year 2013-14 growth estimate is 4.9%. GDP growth for the first two quarters of fiscal 2013-14 was 4.4% and 4.8%. GDP growth for fiscal 2012-13 was 4.5%.
CSO estimates that Agriculture and Allied Activities that has a 14% weight in total GDP will lead GDP growth. This segment is expected to grow at 4.6% for full year 2013-14 against a growth rate of 1.4% seen in 2012-13. Apart from Agriculture and Allied Activities, the Financing, Real Estate, Insurance and Business Services segment that has a weight of 19% in total GDP, with a growth of 11.2% for 2013-14 against a growth of 10.9% in 2012-13, will contribute to the GDP growth of 4.9% expected for fiscal 2013-14.
Manufacturing with a 14.6% weight in GDP is expected to contract in 2013-14 while Trade, Hotels, Transport and Communication with a 27% weight in GDP is expected to grow at 3.5% in 2013-14 against 5.1% growth seen in 2012-13.
It is possible for agriculture to push up growth for the second half of 2013-14 given good monsoons. Foodgrains production is expected to grow at 2.3% in 2013-14 as compared to a decline of 0.8% seen in 2012-13. However agriculture in India is monsoon dependent and an agriculture led GDP growth is subject to high volatility.
The first nine months of fiscal 2013-14 did not showing any promise for the economy. Passenger vehicle sales were down 5.7% while commercial vehicle sales were down 18.4% in the April-December 2013 period on a year on year basis. January 2014 saw passenger vehicle and commercial vehicle sales down 7% and 21% respectively year on year.
The IIP (Index of Industrial Production) growth for the April-December 2013 period was a negative 0.1% while the manufacturing growth was a negative 0.6%. Consumer durables have shown a negative growth of 12.9% indication weakness in consumer demand.
Tax collection growth for the April-December 2013 period is below budgeted levels with direct tax collections growing at 12.5% against budgeted growth rate of 17.5% and indirect taxes growing at 6.2% against budgeted growth rate of 20.3%. Slowing economy has hit tax collections. The government is forced to cut plan expenditure by 20% to keep fiscal deficit within budgeted levels of 4.8% of GDP and this cut in plan expenditure will lead to further pressure on economic growth.
Trade deficit is the only bright spot on the horizon with deficit down 27% in the April-January 2014 period. Fall in gold and silver imports by 38% in this period has helped bring down trade deficit. Lower trade deficit is helping pull down current account deficit by 40% for fiscal 2013-14.
CPI (Consumer Price Index) inflation for the month of January 2014 printed at 8.79%, the first below 9% print over the last one year. Falling prices of vegetables has lowered CPI. RBI is unlikely to ease its policy stance despite CPI coming off from highs of 11.24% seen in November 2013 as it is focused on lowering long term inflation expectations.
Source:- firstpost.com
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