India's GDP to grow next fiscal at 7.5 percent: Moody's

US agency Moody's Investors Service on Thursday forecast for India a "stable GDP growth at around 7.5 percent in 2016 and 2017", saying the country is relatively less exposed to external headwinds, like the Chinese slowdown, and will benefit from lower commodity prices.

India is relatively less exposed to external factors, including China slowdown and global capital flows. Instead, the economic outlook will be primarily determined by domestic factors, Moody's said in its report "Global Macro Outlook 2016-17 - Global growth faces rising risks at time of policy constraint".

"Together with Turkey and China among the G20 emerging markets, India benefits from lower commodity prices: In 2014, net commodity imports amounted to 5.9 percent of India's GDP, compared with net exports worth 1.3 percent, 3.3 percent and 4.3 percent for South Africa, Brazil and Indonesia respectively," it said on Thursday.

"In the five years to the end of the decade, we expect GDP per capita (at market exchange rates) to increase by 34 percent in real terms in India, compared with only 3.6 percent in the G20 emerging markets, excluding China and India," the report added.

Instead, the American agency cautioned that India's economic environment is constrained by "banks' balance sheet repair and elevated corporate debt" and the corporate pricing power being constrained by the impact of two consecutive droughts on food price inflation and households budgets.

India's economy is powered by sustained growth in consumer spending, fostered by moderate inflation, still favourable demographics and strengthening investment, in particular foreign direct investment, Moody's said.

"The 23.55 percent increase in public sector salaries proposed by the 7th Pay Commission is worth 0.7 percent of GDP. It is not yet known how this proposal will be implemented but higher public sector wages will most likely contribute to strong consumption growth," the report said.

"The pay increase will also probably raise inflationary pressures. However, we assume the government will cut spending in other parts of the budget to maintain the deficit broadly in line with the 3.5 percent of GDP objective, thereby mitigating some of the inflationary effects," it added.

Moody's said overall growth will fail to pick up steam over the next two years as the slowdown in China, lower commodity prices and tighter financing in some countries weigh on the economy.

The Indian economy grew 7.3 percent in the third quarter ended December 31, 2015 -- down from the 7.7 percent expansion in the previous quarter, but marginally up over the 7.1 percent over the like period of last fiscal, official data showed last week.

Growth was pulled down by lower production in 'agriculture, forestry and fishing', 'electricity, gas and water supply and other utility services' and 'financial, real estate and professional services'.

There was a 6 percent growth in electricity, gas, water supply and other utility services, as against 7.5 percent growth in the second quarter.

The government's mid-year economic review, released in December, lowered the economic growth forecast for the current fiscal to the 7-7.5 percent range, from the previously projected 8.1-8.5 percent, mainly because of lower agricultural output due to deficit rainfall.