India Ratings and Research (Ind-Ra) expects gross domestic product (GDP) to grow 7.1% yoy in FY19. Robust consumption demand and tailwinds from low commodity prices have been the key growth drivers over the past few years. While consumption demand is likely to remain a growth driver in FY19 also, tailwinds from low commodity prices are now turning into headwinds.
On the supply side, all major sectors namely agriculture, industry and services are expected to contribute to FY19 gross value added (GVA) growth, but a significant rebound will be from the industrial sector which is expected to grow at 6.2% in FY19 as against 4.4% in FY18. Even agriculture and services sectors are expected to grow 2.7% and 8.5% in FY19, respectively, translating into an overall GVA growth of 6.9% in FY19 compared with 6.1% in FY18.
Over the past few years, private final consumption expenditure (PFCE) and government final consumption expenditure (GFCE) were the primary growth drivers of the Indian economic growth. Ind-Ra believes, in FY19, the economic growth to be broad based to some extent and gross fixed capital formation (GFCF) to provide support. PFCE and GFCF are expected to grow at 6.8% and 6.5%, respectively, in FY19. While a GFCF growth of 6.5% is an improvement from 4.5% in FY18; however, it will be much lower than the average 16.2% growth witnessed during FY04-FY08.
The government adopted two major policy measures, demonetisation and implementation of the Goods and Services Tax, since November 2016 to increase formalisation of Indian economy. These measures have led to a decline in GDP growth to 7.1% and 6.5% in FY17 and FY18, respectively, from 8.0% in FY16. Ind-Ra believes the Goods and Services Tax regime is likely to benefit the economy over the medium-to-long term; however, the tangible impact of demonetisation is yet to be realised.
Inflation control is one of the major macroeconomic achievements in providing macroeconomic stability during the last few years. Retail inflation declined to 4.5% in FY17 from 9.8% (average) during FY12-FY14, and is expected to fall further to 3.6% in FY18, driven largely by the collapse of the global commodity prices, particularly crude. However, with the global crude prices firming up, Ind-Ra expects retail and wholesale inflation to come in at 4.6% and 4.4%, respectively, in FY19, indicating an end to the current rate cut cycle. Although the trajectory of inflation has reversed since June 2017, there is still some fuzziness with respect to the intensity and the level of its future trajectory. Ind-Ra believes the Reserve Bank of India will remain in a pause mode for an extended period of time.
The pressure of inflation is also finding its reflection in the bond market, which touched 7.38% on 16 January 2018, thus making government’s borrowing expensive. Ind-Ra expects the benchmark 10-year G-sec bond yields of 7.5%-7.6% by FYE19 as compared with 7.2%-7.3% by FYE18. The agency expects fiscal deficit to come in at 3.5% of GDP in FY18. The latest government announcement (17 January 2018) pegs the additional borrowing programme to INR200 billion instead of INR500 billion announced earlier. Ind-Ra believes the reduced borrowing may still not change the fiscal slippage in FY18. Despite FY19 being a pre-election year, Ind-Ra does not expect FY19 union budget to be a populist budget; however, it expects some expenditure reallocation with an increased focus on the rural and agriculture sectors. Ind-Ra expects FY19 fiscal deficit to be at 3.2%, higher than 3.0% stated in the medium term fiscal policy statement in FY18 union budget. A mix of global and domestic factors will keep the Indian rupee range bound at average INR66.06/USD in FY19.