GDP growth, after bottoming out in FY13, so far has followed a steady growth trajectory and is likely to do so even in the medium term. While agriculture might get a boost from a normal monsoon in 2016, industry will benefit from (i) various announcements made in the FY15 and FY16 budgets to address the structural issues plaguing industrial/infrastructure sector, (ii) focus on 'Make in India' and (iii) improvements in the 'ease of doing business'. Information available so far indicates that La Nina, a phenomenon associated with good monsoons, will hold sway in 2016. Manufacturing gross value added grew 8.2% in 1HFY16. Ind-Ra expects the industrial GDP to grow 7.6% in FY17.
Declining inflation, although is a welcome change, has pulled the nominal GDP growth down significantly. This is posing a new challenge for the government. Despite the absolute fiscal deficit amount expected to come close to the budgeted figure, Ind-Ra's estimates fiscal deficit to GDP ratio to come in at 4.1% of GDP in FY16 (budgeted figure 3.9%) due to lower nominal GDP. To achieve the budgeted target, the fiscal deficit will have to be compressed by INR211bn. Ind-Ra believes this can be achieved only by i) deferring parts of subsidy payments to FY17, ii) cutting down capital expenditure or iii) a combination of both. Cutting down capital expenditure, when the need is to step up government investment, will be counterproductive. Ind-Ra expects the fiscal deficit of FY17 to come in at 3.9% of GDP.
Ind-Ra expects commodity prices to remain soft even in FY17, as the International Monetary Fund does not see any significant pick up in global GDP/trade growth in 2016. Taking into account a normal monsoon, a moderate hike in the procurement of food grain prices and some weakness in the rupee, Ind-Ra expects the Wholesale Price Index and Consumer Price Index inflation to come in at 2.7% and 4.9%, respectively, in FY17.
Although Ind-Ra believes the chances of further monetary easing in FY16 are negligible, a maximum 50bp cut in policy rate is possible by FYE17 if macroeconomic data remain stable or favourable. The agency expects the 10-year benchmark G-sec yield to fall in the range of 7.5%-7.6% by March 2016 and 7.2%-7.3% by March 2017.
A benign global GDP/trade has adversely impacted exports. Although FY16 will be the second consecutive year of contraction in exports and imports, Ind-Ra expects them to return to growth in FY17. The agency further expects the current account deficit to widen to USD28.6bn (1.3% of the GDP) in FY17 from USD20.1bn in FY16 (1.0% of GDP). Despite uneven foreign portfolio inflows, capital account is likely to remain comfortable and adequately finance the current account deficit. This will help the rupee trade at an average 67.5/USD in FY17.
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