Fitch Ratings today projected Indian economy to grow at a slower pace of 7.4 per cent in the current fiscal and touch 8 per cent growth only in 2018-19, as it expects the benefits of reforms and impact of monetary easing to kick in with a lag.
The US-based rating agency projected Reserve Bank of India (RBI) lowering interest rates by 0.25 per cent before end of 2016, followed by another rate cut in 2017.
Fitch Ratings’ latest bi-monthly Global Economic Outlook (GEO) report said “We forecast GDP growth to accelerate gradually from 7.4 per cent in FY17 (year ending March 2017) to 8.0 per cent in FY19”.
It projected the growth to be at 7.9 per cent in 2017-18.
The Indian economy grew 7.6 per cent last year.
“Public-sector wage hikes, lagged impact of monetary policy easing, and a better monsoon season than the previous two years, should support growth in the near-term, while decent progress on structural reforms – including the recent landmark passage of the Goods and Services Tax in parliament – should facilitate a turnaround in investment over the medium term,” Fitch said.
It said its forecasts imply that India will remain by a wide margin the fastest growing country among Fitch20 economies.
GDP growth fell to 7.1 per cent in Q2 from 7.9 per cent Q1. This was lower than the 7.6 per cent estimated in the July Global Economic Outlook (GEO) report.
“Persistent investment weakness and soft industrial production suggest the shortfall was not entirely due to short-term volatility in the data,” Fitch said.
It forecasted GDP growth to accelerate gradually from 7.4 per cent in FY17 (year ending March 2017) to 8.0 per cent in FY19.
Private consumption growth was 6.7 per cent in Q2 and is expected to reach 8.8 per cent in FY18 due to increasing real disposable income growth.
In contrast, gross fixed capital formation remained very weak in Q2 of FY16, declining by 3.1 per cent year-on-year.
“Nevertheless, we forecast a sharp pick-up in FY18 investment growth to 6.3 per cent. Strong export growth also continued in Q216, a rebound from the contraction in 2015.
“Meanwhile, import dynamics remained weak and thus net exports will have a 1.6 percentage point growth contribution in FY17 before moderating over the medium-term,” Fitch said.
It said that RBI, led by its new Governor Urjit Patel, is expected to cut its policy rate by 25 basis points to 6.25 per cent before the end of 2016, followed by one more rate cut in 2017.
Headline consumer inflation was 5.1 per cent in August 2016, a 1 percentage point drop compared to the previous month.
“We forecast inflation to start gradually increasing to 5.5 per cent by end-2016, 5.8 per cent by end-2017 and 6.0 per cent by end-2018, the upper end of the 4 per cent plus or minus 2 per cent medium-term inflation target range,” it added.