NewDelhi: Ratings Agency India Ratings and Research (Ind-Ra) has revised down its FY19 economic growth forecast to 7.2% from 7.4% earlier. The key reason is the headwinds emanating from the (i) elevated global crude oil prices and (ii) government’s decision to fix the minimum support prices of all kharif crops at 1.5x of the production cost (A2+FL). Ind-Ra believes the other headwinds lurking on the horizon are the (i) rising trade protectionism (ii) depreciating rupee and (iii) no visible signs of the abatement of the non-performing assets of the banking sector.
At a disaggregated level, Ind-Ra expects private final consumption expenditure to grow 7.6% in FY19 compared to 6.6% in FY18. The thrust for growth is coming from the (i) waning impact of demonetisation (ii) rise in rural consumption due to two consecutive favourable monsoons and (iii) reduction in the goods and services tax rate on several items. However, investment expenditure as measured by gross fixed capital formation is unlikely to significantly improve over FY18. It is expected to grow at 8.0% in FY19. Ind-Ra believes the government capex alone will be insufficient to revive the capex cycle, as its share in the total capex of the economy was only 11.1% during FY12-FY17.
Although the agency expects the annual value of exports to touch USD345 billion in FY19, crossing the peak of USD318 billion attained in FY14, India will continue to face headwinds on the exports front. The recent global developments are threatening to turn into a trade/currency war between US and China. This is not good news for East Asian economies that export intermediate goods to China and in turn for India which is increasingly relying on its Look East policy to sustain and expand exports.
Despite a likely normal rainfall in 2018, Ind-Ra now expects average retail and wholesale inflation in FY19 to come in at 4.6% and 4.1%, respectively as against 4.3% and 3.4% forecasted earlier due to the (i) pass-through of global crude oil prices, (ii) increase in the minimum support prices of kharif crops and (iii) house rent allowance revision by the state governments.
In response to the rising inflation, the Reserve Bank of India so far in this fiscal has raised the repo rate by a cumulative 50bp. It now expects the CPI inflation for 2HFY19 to be 4.8%, 10bp higher than its earlier projection. Ind-Ra does not expect any more hikes in FY19 and therefore expects the benchmark 10-year G-sec to be in the range of 7.8%-7.9% at end-FY19.
Although Ind-Ra expects the central government to meet its fiscal deficit target of 3.3% of GDP in FY19, the current account deficit is likely to touch USD71.1 billion (2.6% of the GDP) in FY19 from USD48.7 billion in FY18 (1.9% of GDP) due to the widening trade gap. Volatility in crude oil prices, portfolio inflows, normalisation of the monetary policy in the advanced economies and a likely USD25 billion mobilisation from non-resident Indians will guide the level of rupee in relation to US dollar, which is expected to average INR68.4/USD through FY19.
(Source : Ind-Ra)