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Abu Dhabi, UAEWednesday 22 August 2018

India's economic outlook is bright despite headwinds

Monsoon season and expected increase in consumption from GST reduction bode well for the economy

Economists are upbeat on the outlook for the Indian economy for this year.

“A fairly satisfactory progress of monsoon and reduction of GST rates for consumer discretionary goods augur well for rural consumption,” says Suman Chowdhury, the president, ratings at Acuité Ratings and Research.

Most of India's population reside in rural areas and about half the population depend on farming for their livelihoods, so the four-month monsoon season, which runs to September, is vital for the performance of the agriculture sector and in turn has an impact on the wider economy.

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Acuité is forecasting that India's gross domestic product growth will come in at 7.3 per cent this financial year, compared to 6.7 per cent last year.

India's $2 trillion economy recently overtook France to become the world's sixth largest economy. A poll of economists by Reuters released on Saturday revealed that India is expected to remain the fastest growing major economy globally this year, helped by the government's increased spending on areas such as infrastructure ahead of the 2019 general election. India's economy is likely to grow at 7.4 per cent in current financial year to the end of March and then by 7.6 per cent the following year, according to the findings of the poll.

There are risks, however. The rupee has weakened to record lows recently and it has been Asia's worst performing currency so far this year.

“We need to watch out for the macroeconomic headwinds particularly the vulnerability of corporate earnings to higher inflation, higher interest rates and the rupee depreciation,” says Mr Chowdhury.

There are expectations that the Reserve Bank of India (RBI) might hike interest rates at its meeting on Wednesday, as it tries to control inflation, which has been driven higher by fuel and food prices, with higher oil prices globally having an impact on India, given that it is a major importer of the commodity. The RBI in June increased interest rates for the first time since 2014.

“With several indicators showing that [economic] activity remained strong in the second quarter and core inflation surging to a four-year high last month, the stage appears to be set for the central bank to hike rates again,” says Shilan Shah, the India economist at Capital Economics.

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