Growth revival in India remains a "concern" due to subdued consumption and investment demand even nine months after demonetisation and nearly two months post GST rollout, says a report.
Growth revival in India remains a “concern” due to subdued consumption and investment demand even nine months after demonetisation and nearly two months post GST rollout, says a report. It also cited mounting bad loans and weak corporate balance sheets as well as farm loan waivers as compounding the problem. According to Dun and Bradstreet, distribution of monsoon remains uneven which might impact rural demand to an extent, while the transition to the Goods and Services Tax (GST) is likely to create some disruption and impact the immediate sales volume across businesses. It noted however that the implementation of GST will help businesses in the mid-term to long-term. “Nine months after demonetisation and two months of GST implementation, concerns to growth dynamics do prevail led by subdued consumption and investment demand, compounded by twin balance sheet problem and strain on state finances due to farm loan waivers,” Dun & Bradstreet India Lead Economist Arun Singh said. D&B expects Index of Industrial Production (IIP) to remain weak at only 2.2-2.4 per cent in July. Singh noted that though there is very little chance of a policy rate cut given the upside risks to inflation, at the current juncture, further policy easing by the Central Bank will also not be helpful as demand conditions are low. “Further monetary policy easing would have limited impact on investment as low demand along with excess capacity prevails. Moreover, transmission of the policy easing has not been effective as banks remain risk averse given deteriorating assets quality,” he said.
Spatial distribution of monsoon with deficit of rainfall across geographical locations and floods in some states poses risk for inflationary expectations which will have a bearing on the course of inflation in the near term, the report said. Moreover, excess liquidity in the banking system along with increase in house rent allowance under 7th Pay Commission would continue to provide upward pressure to prices, it said. D&B expects CPI inflation to be in the range of 2.4-2.6 per cent and WPI inflation to be in the range of 2-2.2 per cent during August, respectively.
Singh said: “Policy makers must ensure that the measures taken to solve the problem in the banking sector do not impact the optimism level amongst companies. The strain in the fiscal balance posed by the unanticipated demand for farm loan waivers across states will have some bearing on the public investment going forward.”