Mining and electricity output to help industrial growth in FY15

Industrial growth has remained fragile since financial year (FY) 2013 due to depressed consumption and sluggish investment demand. The growth decline in consumption (68.8% share in gross domestic product, or GDP, in FY13) is worrisome though not surprising given the subdued consumer sentiment, sustained high inflation and elevated financing costs. In a classic industrial revival, the impact is first felt in the consumer goods sector followed by basic/intermediate goods and finally in the capital goods sector. However, the current performance trend of the use-based sectors does not indicate such a trajectory.

Nevertheless, industrial growth is expected to improve to 4.1% in FY15 (FY14: 0.7%). This improvement will be on the back of election-related expenditure, excise duty cut for the auto sector and project clearances by the Cabinet Committee on Investment. Project clearances so far by the Committee are estimated to be around 4.6% of GDP. Assuming that only 25% of this investment materializes in FY15, it will result in investment growth of 4.1% (FY14: 0.2%). Also, there has been reasonable progress on Delhi-Mumbai Industrial Corridor and Dedicated Freight Corridor projects.

With the settlement of some legal issues, resumption of iron ore mining in Karnataka and Goa and projects worth Rs.233 billion cleared (up to 18 February 2014) in the sector by the Committee, the mining sector is poised for growth in FY15. This will also positively impact India’s external trade, balance of payment and currency by curbing coal import. Since November 2013, the sector has seen four consecutive months of positive growth.

The electricity sector has performed strongly lately and grew by 6.2% year-on-year over April-February FY14. This robust performance is expected to continue in the near term in view of the fast-track clearance of many coal mining projects and projects worth Rs.3.81 trillion being cleared in the power sector.

Rate cut and inflation

Inflation in FY15 will be largely governed by the evolving demand conditions guided by a gradual revival of investment, monsoon and the economic policy pursued by the new government. The average wholesale inflation (based on Wholesale Price Index, or WPI) and retail inflation (based on Consumer Price Index, or CPI) are expected to be 5.5% and 8.0%, respectively, in FY15.

Both the CPI and WPI declined in FY14. The WPI inflation declined by 150 basis points (bps) to 5.9%. In the short term, the seasonal factors could influence the headline inflation. But unless structural factors such as agricultural productivity and bottlenecks in the agricultural supply chain are adequately addressed, keeping food inflation at moderate levels in the medium-to-long-term will remain elusive. The CPI inflation declined by 70 bps in FY14 to 9.5%. Core inflation, a reflection of domestic demand conditions, too, declined in FY14 (core retail: 8.0% and core wholesale: 2.8%).

The 25 bps repo rate hike by the Reserve Bank of India (RBI) in January 2014 signalled that the nominal anchor has changed from the WPI to CPI. In its first bi-monthly monetary policy review on 1 April 2014, RBI maintained a status quo on policy rates. It is expected to remain in the pause mode for an extended period and at best cut policy rate by 25 bps in the second half of FY15. Despite some decline in CPI in FY14, it is still uncertain if the retail inflation will reach RBI’s target of below 8% by January 2015.

  MUNTAZIR ALAM

  PGDM 2ND SEM