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March 09, 2017

Colours of Growth

GDP to rise just a touch next fiscal

We expect GDP growth to rise 30 basis points to 7.4% in fiscal 2018 from 7.1% in fiscal 2017, driven by a rebound in consumer demand, which got postponed after demonetisation.

Aiding consumption growth will be a normal monsoon, benign inflation and softer interest rates. We expect monsoon to be normal in 2017, too, which will ensure agricultural incomes continue to increase. Interest rates will soften due to improved transmission of policy rate cuts by the Reserve Bank of India (RBI). Further, the RBI’s Monetary Policy Committee's aim of 4% inflation over the medium run will ensure inflation remains low and stable.

Why it will be a grind-up

Investments, particularly private, will continue to be a drag. We expect private investments to trail GDP growth in fiscal 2018 and expect to see a material pickup only in fiscal 2019.

The Narendra Modi-led government’s policy actions have focused on lifting the ‘trend’ rather than ‘cyclical’ growth. And prudent monetary and fiscal policies have been accompanied by a moderate pace of reforms. This stance has continued through fiscal 2017 as well. Despite headwinds, the Union Budget for fiscal 2018 resisted the temptation to raise the fiscal deficit target and support a sluggish economy. The RBI, too, stayed focused on taming consumer inflation to 4% on a durable basis and bucked pressure to wield the scalpel in its February monetary policy review.