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Our Bureau

Forecasts revised on signs of improvement in economy

New Delhi , Sept. 27

Credit Suisse, global financial services major, has maintained India's gross domestic product (GDP) growth forecast for 2006-07 at 8.5 per cent as against the consensus 7.6 per cent. This stance has come on the back of signs of improvement in the fiscal and monetary conditions in the economy.

In its quarterly report on emerging markets, Credit Suisse has pointed out that growth was broadening with the industrial production growth posting 10 per cent in financial year 2006-07 so far, as against an average 8.2 per cent in the past two years.

The Credit Suisse report also expected S&P to upgrade by one notch to BBB- the foreign currency sovereign rating of India as early as Q4 2006.

It has also revised down the forecast of the country's combined state and central fiscal deficit (general government fiscal deficit) to six per cent of GDP from seven per cent for financial year 2006-07 and to 5.4 per cent from 6.4 per cent for financial year 2007-08.

"The main reason for our forecast revisions for the general government fiscal deficit is that state governments' fiscal balances are improving", says the Credit Suisse report.

Accordingly, the State Government fiscal deficit estimates have been revised to 2.5 per cent of GDP from 3.5 per cent for financial year 2006-07 and to 2.2 per cent from 3.2 per cent for 2007-08.

The report highlighted that the debt-swap scheme has led to lower interest payments and that the 12th finance commission recommendations have helped in the consolidation of State-level expenditure. Moreover, the implementation of the State VAT since 2005-06 has helped boost revenues.

As regards the Central Government's fiscal deficit, Credit Suisse has said that it was maintaining its forecasts for financial year 2006-07 and financial year 2007-08 at 3.5 per cent and 3.2 per cent of GDP, respectively.

"We are not that worried about the high Q1 FY 06/07 fiscal deficit. The Q1 FY06/07 gross fiscal deficit of Rs 77,740 crore was 52.3 per cent of the full year target of Rs 1,48,700 crore. Fiscal expenditure is likely to be frontloaded in 1H FY06/07, before dropping sharply in 2H FY 06/07", said the quarterly report.

Credit Suisse has also revised the current account deficit forecasts to 1.6 per cent of GDP from 2 per cent of GDP for financial year 2006-07 and to 1.7 per cent from 2.5 per cent for financial year 2007-08. The consensus forecast for the current account deficit was 2.2 per cent of GDP for FY 06/07 and FY 07/08.

On the inflation front, Credit Suisse expected that the wholesale price index inflation may accelerate to 5-5.5 per cent in Q3 of FY 06/07 versus 4.3 per cent in 1H FY 06/07. It's reverse repo rate forecast is 6.5 per cent by end FY 06/07 as against the current six per cent.

More Stories on : Credit Rating | Economy | Financial Services

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