India’s economy is forecast to grow at 7.9 percent in FY2017, from a projected 7.5 percent in FY2016, Goldman Sachs’s managing director (global macro-research) Tushar Poddar, said in a latest note to clients. “The cyclical upturn has already started,” he told the media, adding that improved economic growth would be led by stronger domestic demand, government investments and urban consumption.
Private urban consumption, on the back of an improved labour market, will be the key driver for growth. Higher disposable incomes due to weaker commodity prices and lower interest rates will also aid consumption. The prospect of a significant wage hike for government servants, following the Seventh Pay Commission’s report, is also expected to improve demand, said Poddar.
Most economists expect India Gross Domestic Product (GDP) to grow between 7 percent and 7.5 percent in the current fiscal year.
However, investors in Indian equities do not mirror this optimism currently. Indian corporates continued to report sluggish earnings growth in the July-September quarter and the markets are cautious ahead of a key US Federal Reserve meeting in mid-December. The US central bank is widely anticipated to hike rates this month, its first such move in nine years. A hike could lead to a stronger dollar and a flow of capital from emerging markets to the United States.
Poddar said the Indian rupee will continue to outperform emerging market peers due to the country’s balance of payments surplus and improving growth prospects. He said that foreign direct investments (FDI) will continue to improve, as India eases policies further. Sectors like manufacturing, construction, retail and telecom will be the beneficiaries of the FDI inflows.
But Poddar said there was greater risk to India’s currency from a Chinese Yuan devaluation, which could lead to capital outflows and a sharp depreciation in the Rupee. “This could have negative consequences for unhedged corporate exposures to external borrowings,” noted Poddar. He saw a lesser risk from the Fed rate hike, as this has been factored into.
The Goldman Sachs economist was also not too optimistic of further rate cuts by India’s central bank in the near future. The Reserve Bank of India has already cut rates by 125 basis points this year (one basis point is one-hundredth of a percent).