Updated on 27th March 2015


    • Industrial growth will continue to be slow to revive
    • Despite lower overall inflation, food prices set for uptick this quarter, hitting household budgets
    • Unseasonal rains and uptrend in food inflation will restrain surge in rural markets
    • Moderate rate cuts expected over next quarter as RBI battles food inflation and external balances


The 2015 Budget comes as a big push for investments in infrastructure and manufacturing sector, with several positive moves like reduction in corporate tax rate from 30% to 25% over the next four years, reduction in basic customs duty on certain inputs, raw materials, intermediates and components, announcement of GST with a specific timeline, deferment of GAAR by two years with prospective application, etc. However, the impact of these changes will be felt only in medium term, with limited influence at the ground level over the next two quarters.

The other positive for the year ahead is that the IMF has forecast India’s growth at 7.5% in 2015-16, marginally higher than the 7.2% growth in 2014-15. This shall make India the fastest growing emerging market in 2015-16, surpassing projected 7.2% growth rate of China. This is expected to propel higher foreign capital inflow, supported by policy reforms such as higher FDI limits in insurance, exemption of FIIs from paying MAT on capital gains, etc.

On the other hand, against the medium term uptrend in manufacturing and infrastructure, the agriculture output in rabi season is likely to be lower – on account of both lower area cropped as well as crop damage due to unseasonal rains. Moreover, with marginal 5% increase in NREGA budget, delay in payments, low MSP increases expected this year, etc. growth in rural demand growth will be muted. The effects are already being felt, especially in rural sales of two wheelers, tractors, etc.

Inflation, meanwhile, has been highly supportive for stable growth, and the low inflation trend shall continue in the coming quarter due to weak demand condition and continued low commodity prices. Low commodity prices in the near term will also help in lower trade deficit. However, food inflation remains an area of concern with food price stresses already becoming visible in both WPI and CPI. Obviously, while the RBI has been set on reducing its rates over this year, it will have to factor in the secondary impacts of high food inflation as well as the Fed’s decision to raise rates this year. Rate cuts this year therefore can be expected to be moderate.

Even as the RBI has put the rate trajectory pointing downwards, it is becoming increasingly urgent to resolve the growing NPAs in the banking system. There is a clock ticking there that can blow up this year, if steps aren’t taken soon. The food price uncertainty and primacy given to balancing household budgets also looks to be deterring the conversion of improved consumer sentiment into actual expenses on consumer goods - whereas consumer durables production declined by 5.3% in January 2015, consumer non-durables declined by 0.1%.