India Inc Sees Economic Growth below 7%, Re at 58

But majority of respondents to a poll expect sales to remain strong

    India Inc is yet to buy into the government's reform promises as the majority expect high input cost and policy inaction to weigh on growth this fiscal amid persisting inflationary risk, showed a poll by ING Research. 

Most corporates expect the rupee slide to continue this fiscal, while they maintained a robust outlook on corporate sales, the survey showed. 

While nearly 80% of the 220 corporate entities polled expect the economy to grow at below 7% this fiscal, lower than the Reserve Bank of India's forecast of 7.3%, a similar majority sees headline inflation at above 7%, worse than the RBI's indication of 6.5%. India's growth in January-March slumped to 5.3%, the weakest in nearly a decade, prompting a new round of downgrades from investment banks. 

"Our in-house view of persistence of inflationary risks stems from the likely transmission of hike in prices due to excise taxes, higher railway freight costs, rising electricity prices and expected increases in administered fuel product prices," said the ING Research report. "Additionally, food prices may continue to pose a risk going forward given that the economy is severely supply constrained," the report added. Corporates have dim hopes for any near-term recovery of the weakening Indian currency, with more than 50% expecting the rupee to breach the 58 per dollar mark, while 15% bet for 60 per dollar in the near term. The rupee has weakened by more than 15% since February. India's current account deficit, currently at 4% of gross domestic product, is likely to worsen and the lack of capital flow may put further pressure on the rupee. "Even if capital flows are estimated at $2-3 billion per month, it would be insufficient to finance the current account deficit which is expected to be $5-6 billion," the report said. RBI has pumped in about $20 billion in the spot market in the second half of FY12 to curb the fall of the rupee. 

The report said India is not able to take advantage of the weak rupee while exporting as global economic slowdown has hit demand world over. 

India's trade deficit in FY12 widened to $185 billion. 

"A possible explanation is that negative sentiment curbs demand and affects exports unfavourably. It could also be that margins are under pressure as sales realisations have not kept pace with the rise in input costs due to a weaker rupee," the report said. 

The sentiment of weakness is entrenched, since 50% of the companies propose not to change their hedging plans, even if the Reserve Bank of India were to relax foreign exchange regulations on cancelling and rebooking contracts in forwards market, while 30% of them said they would increase import hedges. 

However, despite lack of optimism in their growth and inflation outlook, majority of the polled respondents expect corporate sales to remain strong this year, reflecting the underlying demand. 

In the past two years, corporate sales have grown by 20%. In the current financial year, nearly 42% of the corporates expect sales to be higher than 15% year-on-year despite pressure on operating margins due to rise in input cost.