Household spending likely to drive India’s GDP growth this fiscal year

The Indian economy is one of the most rapidly growing major economies in the world. It is being able to outperform because the Indian economy varies from its peers by depending more on domestic demand instead of exports.

“We expect India’s real GDP to grow by 7½ percent y/y in 2016-17, driven by household spending”, said Scotiabank in a research note.

Rainfall in the ongoing southwest monsoon has been more than average that would stimulate agricultural output and support rural incomes and consumption. The commitment of administration to enhance rail, road and energy infrastructure would give additional support. However, India is likely to keep struggling with a lack of private-sector investment until the country’s business environment rebounds more.

Meanwhile, Urjit Patel has been named as the next governor of the RBI and will take charge of the office after the present governor Raghuram Rajan steps down on 4 September. Patel is expected to back inflation targeting, underpinning credibility of policy and investor sentiment.

During the central bank’s next bi-monthly meeting, which will take place in October, the interest rate decision would be made by a six-member monetary policy committee for the first time instead of by the governor alone, noted Scotiabank.

“We assess that the RBI has policy space to lower the key repo rate by 25 basis points to 6.25 percent by year-end”, added Scotiabank.

The monetary policy would be carrying larger responsibility for boosting the economic growth as government spending is expected to remain restrained. Moreover, cautious fiscal stance would not be a threat for India’s inflation outlook. Rise in prices quickened faster than RBI’s long-term target of 4 percent, plus or minus 2 percent in July, reaching 6.1 percent year-on-year due to increased food prices. However, inflation is expected to retreat to the target range in the near term after the impact of above-average monsoon rainfall feeds into food prices, according to Scotiabank.