See FY15 GDP at 5.6%; FY16 at 6%, below consensus: Ambit

Moneycontrol Bureau

With an expected rebound in economy – led by investment, manufacturing and construction - Ambit maintains its FY15 growth estimate at 5.6 percent, broadly in line with consensus. It is, however, expecting the economy to grow at 6 percent year-on-year in FY16, a good 50 basis points below consensus estimate of 6.5 percent.

Ambit is basing the FY16 downward estimate on poor health of the banking system, which may result in slow credit growth in FY16 and restrain investment growth. This is likely to have a direct bearing on a substantial part of the services sector.

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At the moment, all eyes are on the first quarter GDP data that is expected to come out on Friday. A CNBC-TV18 poll estimates Q1 FY15 GDP growth to come in at 5.8 percent versus 4.7 percent year-on-year and 4.6 percent quarter-on-quarter, the highest in 10 quarters. The broad range for the Q1 GDP is 5.4-6 percent.

A Reuters survey of over 40 economists shows a more conservative estimate at 5.3 percent growth in Q1 of this fiscal year (April-March).

Finance secretary Arvind Mayaram said growth is on course to recover to about 5.8 percent in the year to March 2015, up from 4.7 percent last year - the second year of growth below 5 percent.

But Ambit expects relatively sluggish credit growth at around 14 percent in FY15 and around 18 percent in FY16. Besides, going by the Finance Minister's fiscal deficit target announced in his July 10 Budget, the NDA was very little fiscal room to achieve the deficit target of 3.6 percent of GDP by FY16. "Since the government will be unwilling to cut overall expenditure too aggressively to achieve this target, it will likely have to slow down the growth in revenue expenditure from 13 percent CAGR (compound annual growth rate) over the past ten years to 10 percent in FY16," an Ambit report says.

Another roadblock on the path to achieving growth is the government’s inability to lay down a roadmap as to how capital for public-sector banks will be raised. Finance minister Arun Jaitley has said that public sector banks (PSBs) require Rs 2.4 trillion of incremental tier-1 capital (equivalent to 85 percent of their current market cap) by 2018.

"If the Government fails to come up with a clear plan on PSB recapitalisation, we cannot see how credit growth will exceed 18 percent in FY16 and hence how industrial growth will exceed 6.5 percent in FY16. In this context, consensus industrial growth estimates of 8 percent in FY16 appear to be overoptimistic," the Ambit report adds.

Ambit expects more sluggishness in policy making in September as Prime Minister Narendra Modi will be focusing on key foreign policy meetings with three great powers and the BJP will be focusing on four important state elections.

Despite Ambit’s eye opener, all’s not lost for the economy. Recent economic data points to a nascent recovery: industrial production is having its best run since last September, infrastructure output growth is at a nine-month high and manufacturing activity is growing at its fastest for 17 months. Capital goods, a leading indicator for investment activity, logged a significant 13.9 percent rise in output in the first quarter of FY15. Indian manufacturing activity grew at its quickest pace in 17 months in July as order books swelled, marking the ninth consecutive month of expansion, according to the HSBC Purchasing Managers’ Index (PMI) survey.