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A clear mandate for the Bharatiya Janata Party (BJP) has rekindled hope for structural reforms and better investment climate and the country’s growth is likely to accelerate to 6.5 per cent in FY16, a Goldman Sachs report said on Friday.
According to the global financial services major, after the BJP's “historic” election victory on May 16, hope for structural reforms has gone up.
“The hope for structural reform which can increase India's growth potential stems partly from the track record of the new Prime Minister-elect, Narendra Modi, who was the chief minister of one of India's fastest growing states, Gujarat, for 12 years, and partly from the BJP’s election campaign platform of economic development,” Goldman Sachs said.
“We have taken the view that a new government will be able to undertake previously stalled reforms which can help in increasing economic growth,” Goldman Sachs Economists Tushar Poddar and Vishal Vaibhaw said.
According to Goldman Sachs, India’s gross domestic product (GDP) growth is likely to increase from 4.6 per cent in FY14 to 6.5 per cent in FY16, driven by an improvement in investment demand and stronger exports.
In FY15, GDP growth is expected to be at 5.5 per cent with downside risks due to the possibility of a less-than- normal monsoon.
The main obstacles to the aforesaid growth forecast are an uncertainty on monsoon and a delay in fast-tracking projects, if any, by the new government.
“The key risk is that expectations from the new government are so high, and that it does not deliver in a commensurate fashion to de-bottleneck the supply side,” the report said.
Despite these risks, India's medium-term growth prospects are good and will benefit from a stable government for the next five years, it said.
The new government's reforms agenda includes removing supply-side bottlenecks to growth, reducing the fiscal deficit, incentivising infrastructure investment, focusing on labour incentive manufacturing and improving governance, the report said.
Inflation is likely to remain "elevated" in the current financial year as the monsoon is predicted to be below normal. Goldman's forecast for CPI is 8 % for FY15.
Inflationary pressures are likely to ease somewhat in FY16, in part, due to tighter monetary policy and fiscal consolidation by the incoming government.
"Our FY16 headline CPI forecast remains at 7 %," the report said.
