India’s 2016 market outlook depends on consumption, corporate profit and inflation – Moody’s

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Courtesy: Asian Development Bank

India is expected to remain among the world’s fastest growing major economies in 2016, but market trends this year will depend on whether inflation remains under control and corporate profits revive, Moody’s Investor Services said in a report.

Moody’s Indian affiliate, ICRA Limited, anticipates a boost in consumption in 2016 from pay revisions for government employees and pensioners, as well as a potential upturn in agriculture and therefore rural demand. But ICRA believes that a broad-based pick-up in investment will only unfold with a lag.

“India enters 2016 on the cusp of a cyclical growth recovery, with inflation under control and the economy benefiting from lower commodity prices,” says Atsi Sheth, a Moody’s Associate Managing Director.

Sheth added that these trends place India at an advantage relative to many similarly rated emerging market peers.

“However, we believe that these advantages will only yield sustainable growth acceleration once Indian corporate and bank balance sheets are repaired, and if the private sector remains internationally competitive,” Sheth said.

While Indian authorities have faced difficulties implementing high profile policy changes such as the goods and services tax, they have initiated a wide range of measures over the last year to spur infrastructure investment, allow greater foreign direct investment, implement inflation targeting, and address banking sector constraints, a Moody’s statement said.

Sheth believes that inflation and corporate profit trends in 2016 will offer clues as to whether these policy efforts have successfully created conditions for growth that are sustainable over the next three to four years.

Moody’s believes that low inflation would indicate a greater balance between domestic demand and supply conditions, and would help India’s private sector remain internationally competitive.

And, because corporate profit taxes are an important source of government revenues, Moody’s believes that stronger corporate profits will support the government’s fiscal consolidation efforts.

ICRA expects the growth of India’s gross value added at basic prices to rise to 7.7% in 2016-17 from 7.2% in 2015-16.

“We believe that the lagged impact of reforms undertaken by the government, the pay revision for government employees and pensioners, as well as the likely cyclical upturn in agriculture and rural demand will provide a modest boost to economic activity in 2016,” said Aditi Nayar, an ICRA Senior Economist.

She added that while the pay revision for central government employees and pensioners will likely boost consumer demand, ICRA believes it will also pose a challenge to fiscal and inflation management.

ICRA believes that a normal monsoon in 2016 after two successive years of poor rainfall would boost agricultural output, restore the purchasing power of the farm sector, and generate an uptick in rural demand.

By contrast, ICRA believes that moderate capacity utilization and the availability of cheaper imports will restrict the pace of overall capacity expansion.

ICRA believes that private investment will also continue to be constrained by the high leverage levels of various corporate groups, the weak asset quality of the banking system, and structural issues plaguing sectors such as steel and power generation.

ICRA points out that the growth performance across sectors will likely remain divergent in 2016.

As for the robust expansion in government capital expenditure — a key engine of growth in 2015 — ICRA believes such spending could moderate in 2016 to accommodate the pay revision, as well as the government’s aim to reduce India’s fiscal deficit to 3.5% of GDP in the financial year ending 31 March 2017.

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