GDP to grow 6.5% in FY16: India Ratings

Expect FY16 gross domestic product (GDP) to grow 6.5% (FY15: 5.6%) based on its estimates that the industrial sector will grow 6.5% (3.6%), says India Ratings.

January 16, 2015 / 16:55 IST

Economic outlook by India Ratings

India Ratings & Research (Ind-Ra) expects FY16 gross domestic product (GDP) to grow 6.5% (FY15: 5.6%) based on its estimates that the industrial sector will grow 6.5% (3.6%).

The agency is of the view that a number of announcements made in the FY15 budget to address the structural issues plaguing industrial and infrastructure sector could gather pace in FY16 besides few more being announced in the FY16 budget. Also, the government’s push for ‘Make in India’ (focus on select 26 sectors) and improving the ‘ease of doing business’ will aid the manufacturing/industrial growth.

Ind-Ra expects both wholesale price index (WPI) and consumer price index (CPI) based inflation to moderate to 2.8% and 6.0%, respectively, in FY16. In response to declining inflation and inflationary expectations, the Reserve Bank of India (RBI) cut the repo rate by 25bp on 15 January 2015. Ind-Ra expects RBI to cut the repo rate by another 75bp by FYE16. The moderation in inflation is based on the assumption of a normal rainfall in 2015, a moderate hike in procurement price, soft global commodity prices and near stable rupee-dollar exchange rate. Declining crude prices is a windfall gain for the Indian economy. It has improved both the inflation and fiscal outlook. As the bond market had already factored in the expected rate cut, the average 10-year G-sec yield fell to 7.93% in December 2014 from 8.75% in August 2014. Ind-Ra expects it to fall in the range of 7.1%-7.2% by March 2016.

Events/actions such as (i) a dramatic fall in global crude prices, (ii) an increase in excise on petrol and diesel, (iii) cancellation of coal block allocations and penalties imposed, (iv) higher surplus transferred by RBI to the government and (v) the announced 10% cut in the non-plan expenditures, are all likely to help the government balance its revenue and expenditure better in FY15. However, Ind-Ra believes these will still not be enough to bridge the gap arising out of the shortfall in tax and non-tax revenue and the fiscal deficit in FY15 will be 4.2% of GDP. However, the fiscal deficit could fall to 3.9% in FY16 with higher growth, expected tax reforms and expenditure rationalisation.