by NR INDRAN / INT

Mumbai: According to the  Macro and political outlook on the following comes into limelight.

GDP – The recent policy measures positive and GDP is likely to Sustain Growth at ~7% , FX Vulnerabilities are there but global funding is easier for now.

BOP – Expect a Draw down in Reserves

External Debt – Short-term Debt; Redemption Pressures Key to Monitor

Fiscal – Emerging Vulnerabilities for FY13

WPI Inflation – Trends Likely to Ease, but some worries persist

Rates – Commences Easing Cycle with CRR Cut, Likely to Ease Rates by 100bps in 2012

Politics – Upcoming State Elections are Key

Risks – Deceleration in Savings; Governance Issues

And No Respite Likely in FY13 As Pressure Points Emerge

Two risks on the fiscal front in the coming year include:

► Losses of state electricity boards – Total losses amounted to ~ Rs700bn in FY11 from Rs267bn in FY07 with five key states ( Rajasthan, TamilNadu, UP, MP, and Bihar) accounting for 70% of losses.

According to Fitch, state support to power utilities has averaged 1% of GDP, comprising mainly of subsidies/subventions and guarantees.

► Implementation of ‘Right to Food Act – Touted as the next sweeping reform and possibly a key election plank for the Congress, the Act aims at providing legal entitlement of food grains (rice, wheat and coarse grains) to 75% of the rural and 50% of the urban population. However, additional expenditure on food subsidies would be a minimum of Rs350bn.

State Elections: Results Could Play an Important Role in Policy Decisions

Upcoming elections in 5 key states will play a major role in determining the incumbent UPA’s performance in parliamentary elections in 2014. Two states each are ruled by Congress and

NDA while BSP commands UP. Key to watch is UP which has 80 seats where the results will play an important role in shaping policy decisions – the Congress performing well would cement its position at the Centre.

Reforms on the back burner due to some of the allies include: (1) FDI in retail; (2) Pensions; (3) Fuel and Fertiliser Subsidies.

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