Icra pegs FY14 CAD at 4.5%, GDP at around 6%

Rating agency Icra on Tuesday said the current account deficit will decline to 4.5 per cent this fiscal, from around 5 per cent last fiscal, following the likely dip in gold imports as well as lower crude prices.

The agency also forecast economic growth to recover mildly to 5.8 - 6 per cent in 2013-14 from around 5 per cent in 2012-13.

The agency says its benign expectations are based on the incentives announced by the government, which will provide a limited boost to non-oil, non-jewellery exports, import of capital goods will remain subdued in the first half pending a pick-up in investment activities, and lower crude prices will dampen growth of oil imports.

Icra expects that GDP at factor cost improved to 5 per cent in Q4 from 4.5 per cent in Q3 of FY13, reflecting a slight improvement in growth of services and agriculture.Also, lead indicators of the services sector suggest a small uptick in growth in Q4.

Merchandise and service sector exports expanded by a healthy 8.9 per cent and 9.4 per cent, respectively, in Q4.

Moreover, a 9 per cent rise in government's revenue expenditure in January-February 2013 against relative to 1 per cent de-growth in Q3, is likely to have boosted growth of community, social and personal services.

However, the report warns that given the large gap, funding of current account deficit in FY14 is likely to remain a key concern for RBI, as macroeconomic and political uncertainties may result in sporadic portfolio outflows and FDI inflows may not record a broad-based pick-up

until after general elections.

Another likely pain area could be a fall in remittances, which on the back of deregulation of interest rates on NRE and NRO accounts by the RBI in December 2011 had contributed to a surge in inflows in FY13. But additional NRI deposits are expected to moderate in FY14 in line with a likely softening of domestic deposit rates.

Also, the large short-term external debts continue to pose refinancing risks, even as the recent depreciation of the rupee will add to the cost of debt servicing.

On the growth-aiding factors, Icra says on the back of cooling inflation the interest rates may fall by 50 bps during the course of the year which in turn will help boost consumption sentiment.

On the negative side, private investment activity is likely to remain weak in the first half as no new projects have been announced in the recent past and that investment pick-up depends on government spending, progress on key infrastructure projects such as the dedicated freight corridor, and execution of investment plans by cash-rich public sector units.

On inflation, it said a good monsoon will dampen food inflation to 6.5-7 per cent this fiscal from 10 per cent last fiscal, while core inflation will be contained at 3.5-4 per cent in H1 by moderation in prices of some industrial inputs and weakening pricing power. Overall, headline inflation is likely to average 5.7-6.2 per cent in FY14 compared to 7.4 per cent in FY13.