Ind-Ra: GDP to Grow at 7.5% in FY16

Link to Ind-Ra's report: GDP Growth to Improve Marginally in FY16

Ind-Ra-New Delhi-29 October 2015: India Ratings and Research (Ind-Ra) expects the gross domestic product (GDP) to expand 7.5% in FY16 compared with 7.3% in FY15. This is marginally lower than agency's earlier forecast of 7.7%. The downward revision in forecast is primarily due to the lower agricultural growth caused by a deficient rainfall. Although investment is showing the signs of incipient recovery, Ind-Ra believes a full blown investment recovery will take anywhere between 12-18 months. The likelihood of the consumption demand growing at 8.2% has brightened in FY16 (FY15: 6.3%; FY14: 6.2%) on a significant moderation in inflation and inflationary expectations.

Although Indian agriculture has over the years become more resilient to monsoon shocks; agricultural output in a large part of India is still monsoon dependent. Ind-Ra expects agricultural growth to expand 0.9% in FY16 (FY15: 0.2%). However, the encouraging part is the sowing of kharif crop for 2015. The total area sown under kharif crops till 16 October 2015 reached 103.88 million hectares from 102.66 million hectares for the same period in 2014. Also, the industry is likely to expand 6.8% in FY16, 0.2 percentage points higher than our earlier forecast. A number of factors are supporting this recovery. Besides the government's key focus 'Make in India', a budgetary push, the early signs of revival in investment/consumption cycle coupled with a fall in inflation/interest rate are expected to drive the industrial recovery.

Ind-Ra expects the inflation based on both Wholesale Price Index and Consumer Price Index to moderate to negative 1.5% and 4.8%, respectively, in FY16 (FY15: 2.0% and 5.9%). Despite unforeseen supply side shocks to select agricultural commodities, the overall inflation has remained benign so far in FY16 and Ind-Ra expects it remain so even in the remaining months of this fiscal. Moderation in inflation/inflationary expectations has prompted the Reserve Bank of India (RBI) to cut the repo rate by 125bp so far in 2015. However, RBI by calling the 50bp repo rate cut, in its fourth bi-monthly review on 29 September 2015, a frontloaded policy action has nearly shut the door on further rate cuts in FY16. Ind-Ra thus expects the average 10-year G-sec yield to trade in the range of 7.2%-7.3% by FYE16.

India, a net commodity importer, like FY15, is continuing to benefit from soft global commodity prices especially crude even in FY16. Till September this fiscal, imports contracted 14.0%. A slowdown in global economic growth is one of the key reasons for soft global commodity prices. However, the flip side of the global slowdown is that our merchandise exports also contracted by 17.5% till September this fiscal. As a result, the current account deficit for FY16 could come in at USD20.7bn (1.0% of the GDP), down from INR27.9bn in FY15 (1.3% of GDP). As capital inflows are likely to remain robust, Ind-Ra expects a net addition of USD66.2bn to India's forex reserves in FY16. This will put pressure on the rupee to appreciate. However, Ind-Ra expects RBI to intervene in the forex market, leading to the rupee settling for an average 64.95/USD in FY16 against 61.14/USD in FY15.

Ind-Ra believes that the fiscal deficit target of 3.9% for FY16 is achievable because the projections of government's net earnings and expenditure for the year are modest.

Figure 1FY16 Economic Outlook (%) FY14 FY15 FY16 (October Forecast)Gross value added at FY12 prices 6.6 7.2 7.5- Agriculture 3.7 0.2 0.9- Industry 4.5 6.1 6.8- Services 9.1 10.2 9.8Real GDP 6.9 7.3 7.5- Private final consumption expenditure 6.2 6.3 8.2- Government final consumption expenditure 8.2 6.6 7.3- Gross fixed capital formation 3 4.6 6.9- Gross capital formation -2.4 5.4 6.9- Net exports (% of GDP) -1.8 -1.4 -1.4Average wholesale inflation 6 2 -1.5Average retail inflation 9.5 5.9 4.8Year-end interest rate 8.8 7.8 7.2-7.3Average exchange rate (INR/USD) 60.5 61.14 64.95Fiscal deficit (central government, % of GDP) 4.4 4 3.9Current Account (% of GDP) 1.7 1.3 1Source: Ind-Ra, Central Budget, Central Statistical Organisation and RBI

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