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. As the downside to agriculture has reduced due to a subpar 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. IIP in FY16 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 buzz and projected India as an important destination for manufacturing activity, it will take a while before they translate on the ground. Private investment is still down and out due to lack of demand, suboptimal capacity utilisation and cheap imports in select cases.
FY16 witnessed some traction in urban demand. With a favourable monsoon Ind-Ra believes even rural demand will gradually pick up. A sustained decline in inflation and monetary easing would help consumption demand to revive further in FY17. Ind-Ra expects Wholesale Price Index (WPI) based inflation to turn positive in early FY17. 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. Both WPI and Consumer Price Index based inflation are likely to remain moderate and within the Reserve Bank of India's (RBI) comfort zone.
Low inflation, weak industrial growth and normal monsoon are likely to result in further loosening of policy rates. Ind-Ra expects at least one more (25bp) policy rate cut by RBI in FY17 and a faster monetary transmission due to the cut in small savings rates and as banks adopt the marginal cost based lending rate. Although FY17 fiscal arithmetic looks a bit sketchy, Ind-Ra believes the government will be able to achieve its fiscal deficit target 3.5% of GDP.
Given the global/domestic economic conditions, Ind-Ra expects the current account deficit in FY17 to remain benign at 1.2% of GDP. Accretion to forex reserves is expected to be about USD28bn and average INR/USD to be 67.79 in FY17. However, Ind-Ra sees pressure emerging on the services export and remittances front in FY17. In FY16, the growth of services exports was negative in seven out of 11 months for which data is available. In fact during April-February FY16, services exports showed a contraction of 5.6%. A sustained weakness in oil prices has affected the remittance income as India receives more than half of its remittances from the Middle East. Remittances (private transfers) at USD15.305bn in 3QFY16 are the lowest since 1QFY12 (USD14.779bn).
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