India Ratings revises GDP growth downwards to 7.7% for 2016-17

COIMBATORE: India Ratings and Research has revised its gross domestic product (GDP) growth forecast for 2016-17 downwards to 7.7% from its earlier forecast of 7.9%. Despite favourable prospects for agriculture due to an above normal monsoon, industrial recovery is proving to be a drag on the 2016-17 growth prospects, the agency said.
“The resilience of Indian agriculture on monsoon has increased over the years.As a result, agriculture no longer witnesses a sharp decline in output and gross value added (GVA) in the years of a sub-par monsoon,” it said. “As the downside to agriculture has reduced due to a sub-par monsoon so has the upside to agriculture with a favourable monsoon.”
“The industrial recovery continues to be weak and fragile and this is getting reflected in the monthly Index of Industrial Production (IIP) data,” India Ratings said. IIP in 2015-16 (till February) has grown by just 2.6%.
“While the government’s initiatives such as ‘Make in India’, ‘Digital India’, ‘Start Up India, Stand Up India’ and ‘Ease of Doing Business’ have created a buzz and projected India as an important destination for manufacturing activity, it will take a while before they translate (into results) on the ground,” it said.
“Private investment is still down and out due to lack of demand, sub-optimal capacity utilisation and cheap imports in select cases,” the agency stated. With a favourable monsoon India Ratings believes even rural demand will gradually pick up. A sustained decline in inflation and monetary easing would help consumption demand to revive further in 2016-17.
Wholesale Price Index (WPI) based inflation would turn positive in early 2016-17, the agency said. “This will be positive for both government and corporates. Continuous WPI deflation since November 2014 has not only reduced nominal GDP growth but also affected the top-line growth of corporates,” it said.
“Low inflation, weak industrial growth and normal monsoon are likely to result in further loosening of policy rates,” the agency stated. India Ratings, which is part of the Fitch Group, expects at least one more (25 bps or 0.25%) policy rate cut by RBI in 2016-17 and a faster monetary transmission due to the cut in small savings rates and also due to banks adopting the marginal cost based lending rate. Though fiscal arithmetic looks a bit sketchy, the agency believes the government will be able to achieve its fiscal deficit target 3.5% of GDP.