V-Shaped Recovery of Indian Economy Unlikely: India Ratings

The ratings agency also said, while releasing its economic outlook for 2018-2019, that the country’s fiscal deficit could slip to 3.5% this year.

A general view of Mumbai's southern financial district, India, April 5, 2016. Credit: Reuters/Danish Siddiqui/Files

A general view of Mumbai’s southern financial district, India, April 5, 2016. Credit: Reuters/Danish Siddiqui/Files

New Delhi: The Indian economy will have a gradual recovery – most likely U- rather V-shaped – and is unlikely to get back to the over 8% growth trajectory anytime soon, according to India Ratings and Research.

Moreover, this projection is subject to the condition that there should be no disruptions, either man-made like demonetisation or market-induced like a spike in international oil prices.

“The economic recovery will be gradual,” Sunil Kumar Sinha, principal economist, India Ratings and Research, told The Wire.

The agency has forecast 7.1% GDP growth for the next fiscal, up from the 6.5% projected for the current year. The recovery will be driven by private consumption expenditure (PFCE) and gross fixed capital formation (GFCF).

PFCE and GFCF are expected to pick up to 6.8% and 6.5% respectively in the coming fiscal, from 6.3% and 4.5% projected this year. Sinha clarified that while forecasting GDP growth, the agency has assumed that there would be no major disruption during the coming fiscal.

But he admitted that India is vulnerable to a spike in the global oil market as it meets over 80% of its crude requirement through imports. The GDP growth projection could go wrong if oil prices rise more sharply than expected, Sinha added.

Crude prices are projected to remain at an elevated level in 2018-19 as a recovering world economy, coupled with output cuts by producers, will keep the market tighter.

Meanwhile, all is not well on the fiscal front. Despite the government cutting its extra borrowing plan from Rs 50,000 crore to Rs 20,000 crore for this fiscal, a significant fiscal slippage is feared.

Finance minister Arun Jaitley has budgeted the fiscal target for the current year at 3.2% of GDP.

But India Ratings has said that the deficit could slip to 3.5% .

Its chief economist, Devendra Pant, has cited low non-tax revenue collections from the telecom sector (which is going through a tough time due to aggressive pricing competition injected by market entrant Reliance Jio), lower than expected GDP growth, higher compensation to manufacturing states for loss of revenue following roll-out of the Goods and Services Tax (GST) and pressure for supplementary demands.

“Chances of fiscal slippage are very, very large,” Pant said as he presented his agency’s outlook on the country’s growth prospects for 2018-19 on Thursday.

With both inflation and inflationary expectations rising, the agency expressed fear that the Reserve Bank of India could hike interest rates after seven or eight months.

The rating agency said it expected retail and wholesale inflation to average at 4.6% and 4.4% respectively in 2018-19. But it added, “Although the trajectory of inflation has reversed since last June, there is still some fuzziness with respect to the intensity and its future trajectory.”

The agency said that the pressure of inflation is also finding its reflection in the bond market, and ten-year government security bond yields could go up to 7.5-7.6% in 2018-19 from 7.2-7.3% in 2017-18.

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