India's GDP to grow by 7.1% in FY17 and 7.7% in next two years: Fitch

Fitch Ratings expects India's GDP, after taking into account the imact of demonetisation, to grow by 7.1 per cent for FY16-17, before picking up to 7.7 per cent in both FY17-18 and FY18-19.

The global rating agency observed that gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 per cent hike in civil servants’ wages at the state level.

Referring to official data which showed that year-on-year GDP growth slowed only marginally in 4Q16, to 7 per cent from 7.4 per cent in the previous quarter, Fitch said this number looks somewhat surprising, as real activity data released since demonetisation pointed to weak consumption and services activity – because these transactions are cash-intensive.

By contrast, official data suggest that private consumption was strong in 4Q16 (though services output growth moderated quite substantially), it added.

The rating agency said this raises the possibility that these initial estimates of the growth impact of demonetisation could well be underestimated, with the possibility of revisions to official GDP data later on.

"Macroeconomic policy support to growth may gradually fade. There may still be some positive impact from the previous accommodative monetary policy stance, but the Reserve Bank of India signalled in its February meeting that its interest-rate easing cycle had come to end.

"We are now expecting the policy interest rate to stay at its current level of 6.25 per cent. At the same time, the government announced in the last budget the raising of the deficit target for FY18 to 3.2 per cent of GDP, from 3 per cent, which would support growth," said Fitch.

COMMENT NOW