Indian economy likely to expand at below estimated potential in near future

In the near future, India’s economy is expected to grow below its estimated potential of 8%-10%, according to Scotiabank. The country’s private investment continues to be quite slow because of the slow progress on reforms and improving the ease of doing business; however, there are signs that business confidence in rebounding.

Meanwhile, growth in consumer spending is likely to accelerate. Increasing wages, lower oil prices and accommodative monetary policy will underpin consumer spending growth, noted Scotiabank. India is comparatively shielded from worries of slowdown of China’s economic growth as below 5% of India’s exports are dispatched to China. The euro zone and the US are the top destinations of exports for India.

“We expect real GDP to advance by 7.5% y/y in 2016-17 following a 7.3% gain last year”, added Scotiabank”.

Meanwhile, India’s monetary conditions continue to ease. The RBI lowered the policy repo rate by 25 bps in April and executed several liquidity measures to make transmission of monetary policy more efficient. The country’s muted economic growth and favourable outlook for inflation justify the central bank’s decision of providing further monetary stimulus, said Scotiabank.

Admittedly, India’s consumer prices in February grew 5.2% y/y, consistent with the long-term consumer price inflation target of 4%, plus or minus 2 percentage points. The central bank has set a target for inflation to reach 5% y/y in March 2017. Furthermore, the budget for fiscal year 2016/2017 was comparatively wary. Monetary policy is expected to have more responsibility to boost economic growth as government spending will continue to be restricted, noted Scotiabank. Moreover, the cautious stance of fiscal policy is not likely to be a risk for India’s inflation outlook.

Meanwhile, the budget presented in February maintained its earlier fiscal targets and intends to narrow the central government deficit to 3.5% of GDP in FY2016/17 from 3.9% in 2015/16. However, IMF stated that deficit continues to be at a larger level than the general government’s level, averaging 6¾% of GDP through 2017.

“India’s current account deficit will likely continue to hover slightly above 1% of GDP in 2016-17”, added Scotiabank.