Quicker reforms, lower oil prices could lift GDP in FY16: HSBC report

By: | Published: January 11, 2015 4:21 PM

India's GDP growth momentum remains weak as stalled investments have kept resources locked up but it is likely to pick up from the next...

India’s GDP growth momentum remains weak as stalled investments have kept resources locked up but it is likely to pick up from the next fiscal, said an HSBC report.

According to the global financial services firm, GDP growth is likely to be slow for the October-December as well as the current quarter, before inching up again.

Growth is expected to pick up in 2015-16 and 2016-17, driven by revival in investment and second-generation reforms.

Moreover, the declining oil prices is increasing the real purchasing power of consumers and repairing corporate balance sheets, HSBC said.

India’s GDP growth, which had fallen under 5 per cent, is expected to be between 5.4 per cent and 5.9 per cent this fiscal.

The country’s GDP expanded 5.3 per cent in the September quarter, slower than the 5.7 per cent pace in the preceding June quarter.

“The lingering weakness in fixed investment continues to be the greatest drag on growth. Given the government’s ongoing efforts to untangle stalled investment projects, we expect a gradual revival in this sector from the second half of 2015,” HSBC said in a research note.

“Quicker reforms and lower oil prices could help lift growth; however, for sustained success, far-reaching legislation needs to be enacted,” HSBC added.

In 2015, many key legislations such as the Goods and Services Tax Bill, Land Acquisition Bill, Insurance Bill and the Coal Ordinance will be debated in Parliament. Their passage is critical for a meaningful uptick in growth.

According to HSBC, there is a lot that can be done in the short term on the executive front, even as the legislature goes slow.

Citing examples, the report said the entire agenda of freeing up stuck investments needs to be expedited, largely by executive action, for example, through the Project Monitoring Group (PMG), which intends to find solutions for stuck projects individually.

On the Reserve Bank of India’s policy strategy, HSBC said there is likely to be a 50 basis point rate cuts in 2015.

RBI Governor Raghuram Rajan, during the last monetary policy review in December, kept interest rate unchanged, saying that a shift in stance is ‘premature’ but hinted that a cut may come in early 2015 if inflation continues to ease and government acts on the fiscal side.

“We think the RBI is likely to focus more on reforms that bring down the cost of capital by reducing the credit risk premium, which banks demand as compensation for taking on the risk of nonpayment of loans,” HSBC said.

As mentioned by the governor in a recent speech, if implemented, these reforms will bring down borrowing costs for businesses by more than monetary policy action can, the report said.

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