Barclays positive on economic prospects in India

Despite the recent drop in business sentiment in India, the government remains focused on pressing ahead with economic reforms and reviving growth, the Barclays Bank said. "With the fiscal tailwind remaining significant, the government is using the additional funds for infrastructure spending, especially on highways and railways," noted the bank which held a forum on Asian businesses here this week. Despite the political gridlock in the upper house of the parliament, the government seems confident that it will be able to implement the Goods & Services Tax (GST) next year, and preparation for the new tax continues, the UK-based bank said.

The government is working on the assumption of an 18-20 percent base GST rate. In case of any difficulty in rolling out the GST by April 2016, the government can target a later date during the year as an indirect tax, the GST need not necessarily be implemented from the beginning of a financial year, it said. Barclays also highlighted bank recapitalisation.

"Most people we met said that the government's planned capital injections in the banks is a good start, although this was still short of the banks' long-term capital requirements," it said in a recent report on India. The government's initiative to ring fence banks in an independent bureau is also a positive step, but it will take time before this plan is operational, the bank said. Meanwhile, banks have started passing on the Reserve Bank of India's recent rate cut, which some of the experts believe will help to improve credit demand at the margin.

India also continues to enjoy "a very strong fiscal tailwind" supporting investment.Also, the government is using higher indirect tax revenues to fund key infrastructure spending such as highway construction and railways. Tendering for highway projects and the pace of construction of late has been particularly noteworthy, according to the bank.

"This increase in public sector capex is mitigating the weakness in private investment. Most people in government expect the private capex cycle to remain weak, as excess capacity and subdued aggregate demand prevail, particularly in the manufacturing sector," the bank said.