GDP to Grow 7.7% in FY16 - India Ratings

New Delhi, April 27, 2015: India Ratings and Research (Ind-Ra) expects FY16 gross domestic product (GDP) to grow 7.7% (FY15: 7.4%), driven by a further pick up in private consumption demand. Consumption demand is expected to expand 8.1% in FY16 (FY15: 7.1% and FY14: 6.2%). A significant moderation in inflation and inflationary expectations is likely to boost consumer sentiments, albeit gradually. The share of private consumption demand in GDP is around 60%. Even investment and government expenditure would provide adequate support to consumption-led GDP growth. 

There are conflicting views with respect to the monsoon in 2015 as Indian Meteorological Department is predicting less-than-normal monsoon and private forecaster Skymet is expecting a normal monsoon in 2015. Ind-Ra expects agricultural growth to come in at 2.1% in FY16. Although much would depend on the spatial/geographical distribution of rains during the monsoon season, the agricultural growth could be lower in case of a sub-normal monsoon. A sustained government focus on ‘Make in India’ and ‘ease of doing business’ and the successful auction of coal mines could push the industrial growth to 6.5% in FY16 (FY15: 5.9%). 

Indi-Ra expects both wholesale price index (WPI) and consumer price index (CPI) based inflation to moderate to 2.4% and 5.6%, respectively, in FY16. Retail and WPI inflation declined to 5.2% and negative 2.3% in March 2015, respectively. Moderation in inflation/inflationary expectations prompted the Reserve Bank of India (RBI) to cut the repo rate by 25bp each on 15 January 2015 and 4 March 2015. Ind-Ra expects RBI to cut the repo rate by another 50bp by FYE16. Although the unseasonal rains in March 2015 and less-than-normal monsoon in 2015 can up the risk of food inflation, Ind-Ra believes a) soft global commodity/crude prices, b) low growth in the minimum support price of food grains in FY16, c) low pricing power of the manufacturing sector and d) effective government intervention in the food market would keep the inflation within the glide path of RBI. 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, benefitted considerably from the fall in global commodity prices especially crude in FY15. Even in FY16, the country is likely to reap this benefit, in view of soft crude prices. As a result, current account deficit for FY16 could come in at USD22.5bn (1.0% of the GDP), down from INR23.1bn in FY15 (1.1% of GDP). With capital inflows remaining strong, the agency expects a net addition of USD74.2bn to India’s forex reserves in FY16, putting pressure on the rupee to appreciate. However, Ind-Ra expects RBI to intervene and mange it in the band of 61/USD-64/USD, leading to the rupee settling around an average 63/USD in FY16. 

Ind-Ra believes that the fiscal deficit target of 3.9% for FY16 is achievable because the projection of government’s earning and expenditure for the year is moderate. 

(Source: Senior Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company, Mumbai.)