India Ratings and Research (Ind-Ra) has revised its gross domestic product (GDP) growth forecast for FY17 upwards to 7.8 per cent from its earlier forecast of 7.7 per cent. The upward revision has been prompted by the progress of monsoon and the sowing of kharif crops so far. With the exception of the East and Northeast, the rainfall in other regions of the country has been more than the long period average.
With a favourable monsoon so far, Ind-Ra expects rural demand to recover in FY17. This coupled with urban demand, which will be aided by the Seventh Central Pay Commission payout, will give a fillip to the consumption demand in the economy. Ind-Ra expects consumption demand to grow at 8.4 per cent in FY17. However, industrial growth at 7.2 per cent in FY17 will still be lower than the 7.4 per cent witnessed in FY16.
The key factor that is holding the acceleration of industrial growth is investment recovery. The incumbent government has taken several initiatives. For example, to encourage manufacturing activity there has been a concerted focus on improving the ease of doing business through programmes such as Make in India, Start Up India, etc. Similarly, to address the power sector woes, it has introduced the UDAY scheme and to address the woes of other sectors such as metals, mining, roads and oil & gas, etc., it has introduced debt restructuring schemes. However, all this has failed to rekindle the animal spirits in the economy so far.
In fact, the debt-fuelled investment boom that began during FY10-FY11 has taken a heavy toll on the financial health of both corporates and the banking sector. As a result, both are repairing their balance sheets. Another factor that is holding up investments is low capacity utilisation rates in a number of manufacturing sectors due to tepid domestic demand and global overcapacity in sectors such as steel, tyres, etc.
Ind-Ra expects the Wholesale Price Index and Consumer Price Index based inflation to come in at 3.3 per cent and 5 per cent, respectively, in FY17 (FY16: negative 2.5 per cent and 5 per cent). With food inflation surprising on the upside, and households expecting inflation to rise in the near term, the window for further rate cuts by the Reserve Bank of India (RBI) is shrinking. The real risk-free interest rate which had inched up to 4 per cent in July-August 2015 is now down to 1.7 per cent.
Ind-Ra expects that the Union government will still be able to achieve its fiscal deficit to GDP target of 3.5 per cent in FY17. Ind-Ra further expects FY17 to be the fourth consecutive year of comfortable current account deficit (CAD) deficit at $29 billion (1.3 per cent of GDP). Ind-Ra believes that the export and import trends will not change during the remaining months of this fiscal due to the lack of global demand and soft commodity prices coupled with tepid domestic investment demand. A robust foreign capital inflow is expected to add nearly $17bn to the forex reserves in FY17. Yet, Ind-Ra expects average INR/USD to be 67.79 in FY17 due to active RBI intervention in the forex market.