1. Budget 2016: Moody’s pegs GDP growth at 7.5% in FY17, FY18

Budget 2016: Moody’s pegs GDP growth at 7.5% in FY17, FY18

Lower commodity prices and higher consumption spending to provide boost, says report

By: | New Delhi | Updated: February 19, 2016 1:13 AM
indian economy

Lower commodity prices and higher consumption spending to provide boost, says report (Reuters)

Despite global headwinds, India’s GDP could grow 7.5% both in 2016-17 and 2017-18, thanks to lower commodity prices and higher consumption spending, Moody’s said on Thursday.

Its growth outlook for the current fiscal is 7% for India, lower than the Central Statistics Office’s forecast of 7.6% and 7.4% by the Reserve Bank of India.

Outlining some constraints on GDP growth, the rating agency said business investment was hampered by banks’ balance sheet repair and elevated corporate debt. Secondly, corporate pricing power has been limited by the impact on food price inflation and households’ budgets of two consecutive droughts, it said.

In its ‘Global Macro Outlook 2016-17, Moody’s said downside risks to global growth have increased on concerns about weaker growth in China, potential further currency weakness and tightening of financial market conditions. It said G20 GDP growth will be flat in 2016 at 2.6%, similar to last year and rising to only 2.9% in 2017. China’s growth would continue to decelerate from 6.9% in 2015 to 6.3% in 2016, and 6.1% in 2017.

However, India’s economy would be powered by sustained growth in consumer spending, lower commodity prices, moderate inflation, favourable demographics and strengthening investment, in particular foreign investment.

“In the five years to the end of the decade, we expect GDP per capita (at market exchange rates) to increase by 34% in real terms in India, compared with only 3.6% in the G20 emerging markets excluding China and India,” Moody’s said.

The pay hike in public sector proposed by the 7th Pay Commission would most likely contribute to strong consumption growth. While the salary increase could raise inflationary pressures, the rating agency said the government might cut spending in other parts of the budget to maintain the fiscal deficit broadly in line with the 3.5% of GDP objective, to mitigate inflationary effects. It projected retail inflation to be within the RBI’s target of 5% by early 2017. As India is relatively less exposed to external factors, including a slowdown in China and global capital flows, Moody’s said its economic outlook would be primarily determined by domestic factors.

“In a context of low growth in global trade in goods, India’s large services export sector (IT services account for around 18% of total exports) provides another source of resilience,” it added.

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