Crisil sees hit on real estate, infra and cap goods, boost for agriculture, GDP hit

CRISIL has cut its estimate for India’s GDP growth rate to a decade-low of 4.8% for the current financial year ending March 2014, but it has pointed to a strong performance by agriculture.

It warned that the infrastructure, capital goods, automobiles and real estate sectors are in for a tough time this year.

“Agriculture is set to surprise on the upside because of a bountiful and well-distributed monsoon. Farm GDP growth could more than double from last year’s 1.9% to 4.5%. This will help check food prices and support rural consumption,” it said in its State of the Nation’ report today.

Manufacturing performance will be disappointing, while services, the biggest component of India’s GDP, will also see slower, but above-average growth.

Services, which have been the bulwark of the economy for several years, will grow at just 6.5% this fiscal compared with the nearly 10% through the last decade, the ratings agency said.

It said the weak rupee will help export-linked sectors such as IT-ITES, pharmaceuticals, textiles, readymade garments and cotton-yarn spinning.

“The rupee could rebound to Rs.60/USD by March 2014 as the current account deficit declines to 3.9%, but the currency will remain significantly depreciated compared with last fiscal,” Roopa Kudva, Managing Director & CEO, CRISIL said.

The farm fillip and pricing power will help the tractor and telecom sectors, respectively, to do well, Crisil said.

While a weak rupee is good for Indian businesses that sell to foreign markets, it will hurt Indian companies that have borrowed from foreign markets as their loan sizes and interest payments rise.

Larger firms with operating income over Rs.1,000 crore are more severely impacted by higher levels of indebtedness and increasing stress on financing cost, it said. But forex volatility is the least of the sources of stress for 2,481 companies CRISIL rates as investment-grade
as it affects only 6% of them, the agency said.

“Stretched working capital cycles are aggravating liquidity pressures on companies. Overall, liquidity pressures are a source of stress for 16% of the (2,481) companies analysed; but for larger firms it is higher at 27%,” Kudva pointed out.

What stresses nearly a quarter of the companies analysed is the demand slowdown, it said. “Two out of three sectors will see a decline in revenue growth. The collapse of the investment cycle will severely dent infrastructure, capital goods, automobiles and real estate sectors,” it said.

“With luck, if agriculture surges 6%, it could push overall GDP growth to 5.2%,” Kudva said. “The economy will stay in L-shaped trajectory through this fiscal, unlike the V-shaped recovery seen after the Lehman crisis in 2008.”