Leading Rating agency, ICRA expects GDP growth to record a mild uptick to 7.4% in 2015-16 from 7.3% in 2014-15, and growth of GVA (gross value added) at basic prices would remain steady at 7.2% in 2015-16.
Higher Government capital spending, as well as efforts to facilitate clearances and simplify approvals have contributed to a pickup in investment activity, although the recovery is yet to widen beyond select sectors, says ICRA in a report.
According to ICRA, moderation in inflation, upward revision in minimum wages and transmission of monetary easing are expected to buffer urban consumption demand in the ongoing fiscal. However, the uncertain outlook for rabi crops is likely to draw out the prevailing weakness in rural sentiments. Mixed trends in domestic consumption, availability of cheaper imports and continuing contraction of merchandise exports would prevent a sizable improvement in capacity utilisation in the current year. Moreover, high leverage levels of various Corporate groups and weak asset quality of the Banking system continue to constrain the pace of the economic recovery.
Growth of GVA at basic prices is estimated to have improved to 7.3% in Q2FY16 from 7.1% in Q1FY16 on a year-on-year (y-o-y) basis, led by a pickup in the pace of growth of industrial output, execution in some infrastructure sectors, Government spending and services exports. ICRA expects the expansion in industry (to ~6.8% from 6.5%) and the services sector (to ~9.0% from 8.9%) to have risen in Q2FY16 relative to the previous quarter. However, the pace of growth of agriculture, forestry and fishing is expected to have eased to ~1.0% in Q2FY16 from 1.9% in Q1FY16, with the unfavourable monsoon dynamics dampening kharif output of several major crops as revealed by the First Advance Estimates of crop production.
In ICRA’s view, the revision in salaries and pensions of Central Government employees post the implementation of the recommendations of the Seventh Central Pay Commission (SCPC) would spur demand in the coming fiscal. Assuming that the revision is rolled out as scheduled and there are no lump sum arrears that need to be released, ICRA expects the lower ticket sized consumer durable segment to receive a spending boost, from new as well as replacement demand. Additionally, several State Governments may implement pay hikes over the course of 2016-17, which would provide further impetus to consumption activity.
Absorbing the fiscal impact of the SCPC’s recommendations is likely to pose a challenge to the GoI’s target of reducing its fiscal deficit from 3.9% of GDP in 2015-16 to 3.5% of GDP in 2016-17, and necessitate a combination of revenue augmentation measures and expenditure rebalancing. To some extent, higher disposable incomes of Government employees and pensioners would boost consumer spending and therefore the tax revenues of the GoI. In spite of this, the fiscal space available to support a sharp growth in capital expenditure from the GoI’s budget in the coming fiscal would be limited, in ICRA’s view. Thus, the availability of funding from extra-budgetary sources such as the National Infrastructure and Investment Fund would be crucial to support a pickup in investment activity. Overall, ICRA expects a shift in the nature of Government spending stimulus from an investment-led growth in FY16 to a consumption-led growth in FY17.
Shortfalls in full year direct tax and disinvestment collections and the fiscal impact of the implementation of the One Rank One Pension Scheme for the defence services are likely to be offset by the healthy growth in indirect tax and non tax revenues as well as lower fuel subsidies. According to ICRA, a slippage relative to the fiscal deficit target for 2015-16 appears increasingly unlikely with the GoI’s revenues in the remainder of FY16 to receive a boost from the recent hikes in excise duty on fuels and the Swachh Bharat Cess.
With the savings related to net oil imports (USD 9.5 billion) offset by lower non oil merchandise exports (USD 6.5 billion), higher gold imports (USD 2.3 billion) and a narrower services trade surplus (USD 1.2 billion), India’s current account deficit is likely to narrow modestly to USD 8.5-9.0 billion in Q2FY16 from USD 10.1 billion in Q2FY15.
Measures introduced recently by the GoI to prop up exports are likely to have a limited impact in the current year, with the sluggish growth trends for major export markets likely to continue to constrain volume growth. Nevertheless, benefiting from the cushion provided by the fall in commodity prices, the Indian current account deficit is expected to ease to ~1.0% of GDP in FY16 from 1.3% of GDP in FY15.
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