India's GDP seen at 7.5% in FY18 as demonetisation impact is waning, says Moody's

New Delhi: India’s economic growth will accelerate to 7.5 percent in the current fiscal and the government’s reform push will help achieve 8 percent GDP growth rate in about four years, Moodys said today.

In its Global Macro Outlook, Moodys Investors Service said the ruling BJPs victory in Uttar Pradesh state elections indicates that the government has remained politically popular despite the demonetisation exercise.

“We expect marginally faster growth in India. According to our forecast the economy will grow 7.5 percent in fiscal year 2017 (2017-18) and 7.7 percent in fiscal year 2018 (2018-19),” it said.

Indian economy grew 7.1 percent in 2016-17 fiscal. Moodys, however, cautioned that persistent banking sector weakness from a high proportion of delinquent loans on bank balance sheets will weigh on growth, if not resolved, by constraining credit for investment related activity.

Overall, we continue to believe that economic growth will gradually accelerate to around 8 percent over the next three to four years, Moodys said, adding that the negative impact of demonetisation on the economy was limited in size and duration.

The World Bank has earlier this week projected India to clock a 7.2 percent growth rate in the current fiscal on reform momentum and improved investment scenario.

The government has been successful in pushing through several key reforms, including liberalisation of FDI rules in a number of key sectors such as defence, railway infrastructure, civil aviation and insurance.

Besides, Direct Benefit Transfer scheme for food, fertiliser and kerosene subsidies, July roll out of the goods and service tax, and a national bankruptcy code are among other reforms undertaken by the government.

“Together, these will help reduce inefficiencies and improve trend growth over the long run,” Moodys said.

The inflation rate has steadily declined to 3 percent as of April, due to weaker food price inflation.

“We believe that the inflation rate will rise to around 5 percent by the end of this year, once the effect of this temporary factor fades,” it said.

Moodys expect the Reserve Bank of India to hold the policy repo rate steady, holding a neutral stance in this growth environment.

“Private sector investment has remained weak despite progress on reforms, suggesting that some hurdles to investment remain binding in many cases,” Moodys noted.

As regards China, Moodys said its GDP growth will decelerate over the year due to reduced property-related investment as liquidity-tightening measures of the central bank and regulatory measures intended to limit the growth rate of shadow banking take effect.

“We expect that real GDP will grow at 6.6 percent in 2017, in line with the target of at least 6.5 percent and higher if possible, falling to 6.3 percent in 2018,” it said.