Fitch, ADB lower india growth forecast for FY-18

Fitch Ratings and Asian Development Bank (ADB) have lowered India’s economic growth forecast for the current fiscal mostly due to continuing after effects of note ban and transitionary impact from introduction of Goods and Services Tax (GST). Fitch Ratings has lowered India’s economic growth forecast for the current fiscal to 6.9 per cent from 7.4 per cent after the GDP growth “unexpectedly faltered” in the April-June quarter.

The credit rating agency said however that it expects the economic activity to accelerate in the second half of the fiscal year with the waning impact of one-off events including the demonetisation shock in late 2016 and the GST rollout in July, which had dampened growth in the short term. “The large stock of non-performing loans on bank balance sheets could, however, dampen the outlook for credit growth and business investment,” Fitch Ratings in its latest Global Economic Outlook (GEO). The Asian Development Bank (ADB) had on September 26 slashed India’s GDP growth forecast for the current fiscal to 7 per cent from 7.4 per cent owing to weakness in private consumption, manufacturing output and business investment.

India had posted a 7.1 per cent growth in in 2016-17. ADB pencilled in 7.4 per cent for 2018-19, down from the earlier forecast of 7.6 per cent in July. Fitch Ratings said the global economy has improved markedly this year and is on course to recording its fastest expansion since 2010. India’s GDP growth at 5.7 per cent in the first quarter (April-June), down from 6.1 per cent in the previous year, is “the lowest outturn since early 2013, and GDP has now been cooling for five consecutive quarters”, it said. Economic activity in the quarter, it said, may have been disrupted by firms running down inventory ahead of the implementation of the Goods and Services Tax (GST) in July.

The manufacturing sector lost steam in the quarter, growing at a meagre 1.2 per cent year-on-year. The primary sector also dampened growth, while construction and tertiary activity bounced back. On the expenditure side, net trade was a big drag on growth, with exports decelerating sharply (after an admittedly strong January-March print) and import growth remaining buoyant (at 13.4 per cent yoy). “In light of the poor 1H17 (first half of 2017) outturns, we have downgraded our forecast for FY17-18 (year-ending March 2018) to 6.9 per cent, a cut of 0.5 percentage points compared to the June GEO,” Fitch said.

Forecasting acceleration in activity in the second half of the current fiscal, it said consumption should drive the pick-up in growth. “Motorcycle sales – a good indicator of rural household consumption – have gained strong momentum, bouncing back in July and August after having fallen sharply in 1H17. Investment is also expected to tick up in the quarters ahead, in part bolstered by ramped-up public sector infrastructure spending, Fitch said.

The Reserve Bank of India (RBI) cut its policy rate to 6 per cent in August, resuming the monetary easing cycle initiated in early 2015. “However, monetary policy loosening has taken place in the context of rapidly falling inflation, implying that the RBI’s policy stance as measured by the real policy rate has not been so accommodative,” it added. The global economy has improved markedly this year but the current favourable mix of strong growth and highly-accommodative macro policies could be as good as it gets, it said.

“Our forecasts imply something of a ‘sweet spot’ for the global economy in 2017 and 2018 with abovetrend growth and still highly accommodative global monetary policies. However, this is not a pattern we expect to persist into 2019 and beyond as output gaps close in advanced economies and monetary policy support is withdrawn,” said Brian Coulton, Fitch’s Chief Economist. Global growth has been upgraded to 3.1 per cent in 2017 from 2.9 per cent in June, and 2018 growth has been upgraded to 3.2 per cent from 3.1 per cent. While slashing its outlook on India’s growth in current and next fiscal, ADB was, however, bullish on growth gaining traction on reforms.

“Private consumption is expected to pick up on the back of low inflation and anticipated wage hikes. Manufacturing is also likely to bounce back as the sector adjusts to the new tax regime,” the multilateral lending agency said in an update on its Asian Development Outlook (ADO) 2017. The ADB raised its forecast for Chinese economic growth to 6.7 per cent in 2017 from 6.5 per cent and upped its estimate for 2018 to 6.4 per cent from 6.2 per cent. India’s growth fell to a 3-year low of 5.7 per cent in the April-June quarter of 2017-18 “due to lingering effects from demonetisation and transitory challenges related to the new goods and services tax (GST) regime”, it said.

“Weakness in private consumption, manufacturing output, and business investment has resulted in lowering the short-term growth outlook for the country,” it added. On the June quarter dip in expansion, it said growth in private consumption and industry declined compared to previous quarters. Fixed capital formation grew by a sluggish 1.6 per cent, indicating a sharp slowdown in private investment. Government consumption and services, however, continued to buoy economic activity. “India’s ambitious reforms agenda will lead to higher long-run growth for its economy,” said Yasuyuki Sawada, ADB Chief Economist. “Despite the short-term hiccups as firms adapt to the national GST, we believe that continued reform progress will help India remain one of the world’s most dynamic emerging economies.” Moving forward, the Update notes that forecasts for the rest of the current fiscal will be more bullish as private consumption is expected to gather pace on the back of low inflation and anticipated wage hikes.

Manufacturing is also likely to bounce back as the sector adjusts to the new tax regime while services will remain robust as trade and transport services revive with the easing of cash constraints. “Investment growth, however, is likely to remain muted in 2017-18 as budgetary constraints limit government expenditure. Growth will further pick up in 2018-19 as the new tax regime improves domestic competitiveness and government efforts to improve health of the banking sector aid private investment to yield results,” the bank said. Inflation, on the other hand, is expected to average 4 per cent in the current year and 4.6 per cent in the next, significantly lower than the previous estimates of 5.2 per cent and 5.4 per cent, respectively.

The report underlined the commitment by Indian policymakers to meet the fiscal deficit target in 2017- 18, despite the presence of some risks in the form of lower non-tax revenue and a slow start to the disinvestment of public sector enterprises. Tax collections are likely to gather speed as firms adjust to the new tax regime, it said. “Strong global growth and an improved business climate will help India’s exports grow at a faster pace in 2017-18 and 2018-19. Efforts to improve domestic demand will also spur import growth as private investment picks up, thereby widening the current account deficit compared to the past couple of years,” it said.

ADB noted that government efforts to liberalise foreign ownership caps across sectors and foster a friendly investment climate will help attract stable foreign direct investment flows and comfortably finance the current account deficit. It has upped its forecast for growth in developing Asia — comprising 45 countries in the Asia Pacific — to 5.9 per cent in 2017 from 5.7 per cent, and 5.8 per cent in 2018 from 5.7 per cent.

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