Mumbai: The Indian economy is set to recover smartly from June onwards, given a litany of good tidings such as falling inflation and interest rates, and an improvement in the fiscal and current account deficits, international brokerage Credit Suisse said in a report Tuesday.
"We are hopeful that a recovery will finally begin from the June quarter. Over the next few months we should see further fall in wholesale price inflation and interest rates, together with a decline in the twin deficits and mounting evidence of the long-awaited economic recovery," Credit Suisse Director and Chief Economist Robert Prior-Wandesforde said.
He said, however, this optimism does not ignore myriad structural issues plaguing Asia's third largest economy.
Prior-Wandesforde said the first and the foremost positive is that the government will relax its spending controls, which will give a major boost to the economy.
He said: "First and foremost, our estimates suggest that achieving a 4.8 percent budget deficit only requires net budgetary savings of 0.25 percent of GDP, which is easily achievable via divestments.
"Second, the interest rate environment is becoming less oppressive as short-term money market and commercial paper rates have been falling for more than a year now."
He added that RBI has already joined in with interest rate reductions, and benefits of the structural reform measures on business confidence and investment are likely to become increasingly visible.
Prior-Wandesforde noted, however, that the fiscal tightening came at a time when growth was bottoming out, which was evident from the December quarter GDP numbers.
They showed that the government consumption growth fell from 8 percent to under 2 percent (or to the tune of 1 percent of GDP), which is likely to pull GDP down to 5 percent, a downward revision from 5.3 percent for FY13.
Prior-Wandesforde said he is expecting better readings in the final growth numbers and some caution is warranted as the expenditure components of GDP are often revised significantly over time.
On the upcoming monetary policy of RBI, the Credit Suisse Director said he sees a 0.25 percent repo cut on May 3, and a further 0.50 percent easing thereafter, taking the repo rate down to 6.75 percent this fiscal.
On the falling export numbers, he said the weakness of real exports remains a puzzle. "It is hard to believe that a 20 percent depreciation of the rupee (against dollar) over the past 18 months has failed to yield any benefits on the export front."
On the rising current account deficit (CAD), he said admittedly, this is the biggest concern for all now but, as with inflation, which is now consistently surprising consensus on the downside, CAD will also come down gradually.
"The combined effects of the rupee fall, softening domestic demand, higher import duties, a lower fiscal deficit and the partial liberalisation of diesel prices will cut the CAD in time," the Credit Suisse Director concluded.
First Published: Tuesday, April 9, 2013, 20:49