ICRA cautions sub-par monsoon and weak exports as key risks
ICRA expects the Indian economy to grow by 7.6-7.8% in 2015-16, despite the headwinds posed by muted global growth and an unfavourable monsoon outlook, says ICRA in its latest update on Economic Outlook and Macro Trends.Two years post the currency crisis of 2013 and one year into the tenure of Prime Minister Modi's Government, moderation in inflation, external account vulnerability and the Central Government's fiscal deficit have bolstered the Indian economy's ability to withstand bouts of global volatility and fluctuation in investor sentiment. Commenting on the current macroeconomic scenario, Aditi Nayar, Sr. Economist of ICRA says, The improvement in macroeconomic fundamentals reflects the policy actions taken by the Government and the Central Bank, which have been supplemented by tailwinds such as benign commodity prices.
Growth of economic activity expected to dip in Q4FY15: Growth of gross value added (GVA) at basic prices is estimated to decline to 7.0% in Q4FY15 from 7.5% in Q3FY15, on account of factors such as crop damage caused by unseasonal rainfall, decline in growth of electricity, contraction in non-POL merchandise exports and moderation in the pace of expansion of Central Government spending. ICRA expects a slowdown in growth of the services sector (10.8% in Q4FY15; 13.5% in Q3FY15), to be partly offset by an uptick in industrial expansion (5.1% in Q4FY15; 3.9% in Q3FY15) in Q4FY15 relative to the previous quarter, whereas agricultural output is expected to stagnate on a year-on-year (y-o-y) basis.
Economic growth expected to improve gradually in 2015-16, outpace peers: Higher government spending on infrastructure, simplification of clearances, easing of norms for foreign direct investment, continued reform momentum and further monetary easing of 50 bps are expected to support a revival in investment activity in FY16, led by sectors such as roads, urban infrastructure and freight corridors. Moreover, moderating inflation is expected to boost urban consumer demand, while rural demand may post an improvement in H2FY16. Nevertheless, the pace of fresh investment in some sectors such as thermal power and steel is likely to remain sluggish on account of the continuing constraints posed by the lingering sector-specific issues, high indebtedness of some Corporate groups, weak asset quality of the Banking system, and availability of cheaper imports, as evidenced by the sluggish revival of projects despite the intervention of the Cabinet Committee on Investments (CCI).
External sector concerns to remain muted in FY16: Benefitting from the moderation in commodity prices, ICRA expects India's current account deficit to print at 0.9% of GDP in 2015-16, a substantial improvement from the alarming levels above 4% of GDP recorded in 2011-12 and 2012-13. While a recovery in domestic demand and investment conditions is expected to expand import volumes, lower average commodity prices would restrain growth in value terms. Notwithstanding the long-term benefits expected from the Make in India program, and the Government's focus on improving ease of doing business, enhancing infrastructure and moderating inflation, muted improvement in global growth and INR appreciation on an REER basis lead ICRA to expect export growth to remain modest in 2015-16, and act as a drag on overall economic expansion.
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India's small current account deficit is likely to be more-than-adequately financed in 2015-16. Measures taken by the Government in 2014-15 such as easing of norms for FDI in sectors like construction, increase in limits in sectors such as defence and insurance and permission to bring in FDI in some areas of railways such as high-speed train systems, suburban corridors etc., should help inward FDI to register an annual growth of 15-20% during FY16. Additionally, a muted improvement in economic growth in advanced economies is expected to result in a modest rise in NRI deposits to US$ 15-17 billion in the ongoing fiscal from US$ 14 billion in FY15.
Notwithstanding the persistence of ample global liquidity, the extent of FII inflows into India is likely to dip considerably in 2015-16 from the US$ 45.7 billion recorded in 2014-15, even if the limits on G-sec and Corporate debt are increased from current levels. In ICRA's view, the magnitude of FII flows into India in 2015-16 would depend on a host of domestic factors, particularly the momentum of reforms, pace of growth of economic activity and Corporate earnings as well as the extent of Repo rate cuts. Some volatility is likely post the start of the rate hike cycle in the US, which would have a material impact on the volume and direction of flows into emerging markets including India. However, the Indian economy appears well-placed to withstand bouts of such volatility, with foreign exchange reserves having risen to an all-time high of US$ 354 billion on 15 May 2015.
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