The growth is finally bottoming out and there are expectations that improvement is in store going forward. “We forecast India's Gross Domestic Product (GDP) to accelerate from 5.4% in 2012 to 7.2% in 2014 and remain high through 2015-16,” said Tushar Poddar, managing director and chief India economist of Goldman Sachs.
According to Poddar there are three factors which are set to drive this view. “A decline in oil prices in real terms over the next few years, a more favourable external demand outlook and domestic structural reforms which can ease some supply-side constraints,” said Poddar.
However, according to Poddar the near-term outlook remains difficult due to still weak growth, high inflation, and the twin deficits. The pick-up in growth is expected to be gradual. “We see growth picking up gradually to 6.5% in 2013 and further to 7.2% in 2014,” said Poddar.
According to Poddar this is on the back of easing financial conditions, in part driven by some reduction in policy rates, a continuation of reforms boosting confidence, and a normal agricultural crop.
But inflation continues to be a near term worry, warns Poddar. “We raise our 2013 Wholesale Price Index (WPI) inflation forecast to 7.2% from 6.4% earlier due to elevated inflation expectations, higher agricultural prices and the second round effects of the increase in administered prices,” said Poddar. However, Poddar sees headline inflation gradually coming off from third quarter of 2013 due to waning of food and oil shocks.
WPI fell to an eight-month low of 7.45% in October, after showing signs of a surge in September when it touched 7.81% from the 7.55% estimated provisionally in August.
It is unlikely that the Reserve Bank of India (RBI) will resort to an aggressive rate cutting cycle. “We see RBI cutting rates by 50 basis points in 2013 and then again by 50 basis points each of 2014 and 2015,” said Poddar.
In 2012 the RBI has cut the repo rate only once by 50 basis points in April. The street does not expect a cut in the repo rate on December 18, the RBI's mid-quarter monetary policy review.
Goldman Sachs has also raised the fiscal deficit target for FY13 to 5.8% of GDP in part due to the tepid response to the telecom spectrum auctions. However according to Poddar the current account deficit is expected to decline gradually. “This will be mainly due to the decline in oil prices in real terms,” said Poddar.