India's economic activity to pick up in second half of 2017: Moody's

New Delhi: Moody’s Investors Service and its Indian affiliate ICRA Ltd on Monday said the country’s growth of gross value added (GVA) at basic prices will ease to about 6.6% in 2017 from around 7% in 2016, with a likely pick-up in the second half of the calendar year, as the economy adjusts after demonetisation.

India’s economic growth is likely to decelerate to 7.1% in 2016-17 from 7.6% the previous year, chiefly due to an industrial slowdown, the statistics department said earlier this month, sidestepping the possible impact of demonetisation.

The comparable measure of economic activity with Moody’s projection—GVA at basic prices—showed the economy growing 7% in 2016-17, compared with 7.2% last year.

“Even after the currency in circulation is replenished, we expect that India’s economic growth will stabilize with a lag, while remaining strong,” said Aditi Nayar, an ICRA principal economist. “The adjustment and recovery period could stretch to as much as 2-3 quarters for certain sectors.”

Moody’s and ICRA pointed out that after a temporary dampening effect on consumption and investment in the medium term, demonetisation will likely strengthen India’s institutional framework—by reducing tax avoidance and corruption—and should support efficiency gains through greater formalisation of economic and financial activity.

ICRA also said that the loss of incomes in some sectors and deferral of consumption are likely to weigh on capacity utilisation, delaying the capacity expansion plans of the private sector. “And, the extent of capital spending budgeted by the central and state governments for the fiscal year ending 31 March 2018 will affect the extent to which infrastructure spending can stimulate growth in a non-inflationary manner,” Moody’s said.

“Nevertheless, economic and institutional reforms already introduced and potentially forthcoming, continue to offer a reasonable expectation that India’s growth will outperform that of its similarly rated peers over the medium term, and that the country will achieve further improvements in its macroeconomic and institutional profile,” William Foster, a Moody’s vice-president and senior credit officer said.

ICRA said that the focus on digital transactions and the introduction of a goods and services tax (GST) will likely reduce the competitiveness of the unorganized sector. ICRA, therefore, anticipates a relatively healthier expansion of the organised sectors in 2017, at the cost of the unorganized sectors.

ICRA further pointed out that low agricultural growth in H1 2016, as well as healthy reservoir levels on a seasonally adjusted basis, will support the pace of expansion of agricultural output in the first half of 2017. “But agricultural growth in subsequent quarters will be influenced by various factors, the most important being the magnitude and dispersion of monsoon rainfall,” Moody’s said in a statement.

Moody’s also said that in an environment of lacklustre global trade, and with economies globally facing the increasing risk of protectionism, India’s very large domestic markets provide a relative competitive advantage when compared to smaller and more trade-reliant economies.

On the fiscal front, Moody’s said that the government will likely remain committed to achieving its fiscal deficit target of 3.5% of the gross domestic product (GDP) for the fiscal year ending 31 March 2017. However, room to reduce the deficit further to the target of 3.0% of GDP in the following year will be limited, due to the need for increased infrastructure spending and higher government salaries.

On the issue of average CPI (consumer price index) inflation, ICRA said that the rate will soften to 4.5% in 2017 from 4.9% in 2016, although the readings will continue to register month-to-month volatility. Key factors that will dominate CPI inflation in 2017 include monsoon dynamics, the impact of GST on prices of various goods and services, commodity price movements and the rupee-dollar exchange rate.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.