Negotiating the haze

Recent data points on the Indian economy have been far from comforting. Growth had been slowing down sincethe first quarter of last fiscal. The overhang of demonetisation and fears around the impact of the Goods andServices Tax (GST) rollout led to a sharper-than-expected deceleration.

For the first quarter of this fiscal, GDP growth slipped to a three- year low of 5.7%, while the current accountdeficit shot up to four-year high of 2.4% of GDP. Consumer inflation, too, continued its upward march, touching3.36 % in August. Unlike GDP and current account, the pick-up in inflation did not have a surprise element as itwas in line with expectations.

In this month’s theme, we reassess our growth outlook for fiscal 2018. Even assuming that the GSTimplementation issues will be resolved soon, growth this fiscal will now be slower due to a weak first quarter.We have trimmed India’s growth forecast for fiscal 2018 down to 7% from 7.4%. Our number implies a GDP growthof 7.4% on average in the remaining three quarters.

What will support this and what are the risks?

We foresee growth to essentially be consumption-led with following four drivers:

• Near-normal monsoon. The rains were 6% below normal till September 15. Although some geographies are deficient, they account for only 5% of kharif production. And since sowing has progressed well, we expect agriculture go grow at the trend rate of 3%.
• Softer interest rates and inflation. Demonetisation created excess liquidity in the banking system. This has facilitated swifter transmission in lending rates, which were a tad rigid in the past. In fact, rates across instruments have been easing.
• Pay Commission implementation by the states will support purchasing power. Although the Seventh Pay Commission lacks the muscle of sixth, its implementation by states this year will provide mild support to growth.
• Some bounce back in pent-up demand which was postponed due to the demonetisation.

GST implementation issues together with a possible cut in capex by the states (in response to worsening fiscalsituation) can emerge as downside risks to our 7% GDP growth outlook this year.

We have raised our current account deficit forecast to 1.5% of GDP for this fiscal. This is very much within theprudent limits and with robust capital inflows hardly a concern at this juncture.

With growth risks rising and no major threat to inflation, the Reserve Bank of India (RBI) may tilt towards a ratecut in its October policy. More importantly, the RBI’s prognosis of the economy and any revision to GDP growthoutlook will be keenly watched.