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Call this the Modi effect. Citi Research — a division of Citigroup Global Markets — has raised its India GDP growth forecast for 2015-16 to 6.5 per cent on expectations of an accelerated pickup in investments.
This move comes on the heels of the Bharatiya Janata Party’s stunning victory, beating expectations by gaining an absolute majority (272-plus seats of a total of 543) in the 2014 general elections.
Citi had earlier projected economic growth for 2015-16 at 6.2 per cent.
It has, however, retained the GDP growth forecast for 2014-15 at 5.6 per cent.
While the new political formation is likely to set the wheel in motion immediately, effects on the economy will be lagged and a full-fledged recovery will be realised only in 2016-17, Rohini Malkani, Chief Economist, Citi India said in a research note.
Citi is of the view that governance and institutional reforms will start reflecting in the numbers with a lag. Also, high inflation and interest rates could impede growth in the short term, the research note added.
Lower CPI inflation
Citi has maintained its view of Consumer Price Index (CPI)-based inflation averaging 8 per cent in 2014-15 as against 9.5 per cent in 2013-14.
But it has revised down its 2015-16 inflation estimate to 6.5 per cent on the renewed political will of the Government.
The decline in CPI inflation would largely be in line with the “glide path” envisaged by the Patel committee report.
The CPI inflation target of 6 per cent is achievable if structural issues are addressed.
As regards monetary policy, Citi has maintained its view of an extended pause on policy rates through 2014 as CPI inflation roughly meets RBI’s target of 8 per cent by January 2015 and 6 per cent by January 2016.
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