RBI predicts India's growth at 7.6% in 2016-17

30 Aug 2016 Evaluate

Reserve Bank of India (RBI) in its annual report for 2015-16 has stated that India’s growth prospects in financial year 2016-17 are somewhat brighter than what they were in 2015-16, on the back of favourable monsoon and economic growth and the country is likely to grow at 7.6 per cent in the current fiscal, up from 7.2 percent last year. It also said that a better than anticipated agricultural performance and the possibility of allowances under the 7th Pay Commission's award being paid out in the fourth quarter of 2016-17 provide upsides to this projection.

Report further highlighted that the passage of the Goods and Services Tax (GST) Bill marks a new era in co-operative fiscal federalism and a growing political consensus for economic reforms. The implementation of the GST bill would boost trade, investment and growth by reducing supply chain rigidities, encouraging scale economies, cutting down transportation and transaction costs, as also promoting efficiency gains. The GST would also improve the overall competitiveness of the economy by eliminating the cascading impact of taxes on production and distribution costs.

RBI has said that it is also important to take note of impact of the implementation of the Seventh Pay Commission's award on the future trajectory of headline inflation. The largest effects are expected to emanate from increased house rent allowance in the Consumer Price Index, which may push up retail inflation, which shot up to nearly 2-year high of 6.07 in July. RBI also stated that the commitment of the central government to the path of fiscal consolidation in 2016-17 has enhanced the credibility of fiscal policy, which will, in turn, help in anchoring inflation expectations and in improving the business environment, including by fostering credibility among international investors.

Report also noted that the country's external position is viable and well-buffered to sustain a pick-up in non-oil non-gold imports as growth gathers momentum. Nevertheless, the external environment continues to pose challenges stemming from large currency movements, a rising incidence of protectionist measures, swift and massive movements of capital and the amplification of uncertainty by the Brexit vote.

However, the RBI cautioned that Industrial activity has been in contraction mode in the early months of 2016-17, pulled down by manufacturing and looking ahead, no strong drivers are discernible at this juncture that could engineer a turnaround. Some support to industrial activity may, however, stem from the recent measures taken by the Government such as 100 percent FDI in defence, civil aviation, pharmaceuticals and broadcasting. The report also added that even as the outlook for capital inflows is optimistic with the recent liberalisation of FDI policy, the repayment of FCNR(B) deposits under the special swap scheme due in September to November 2016 will need to be managed carefully.

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