India's GDP to grow at 7.5% in 2016, 2017: Moody's

Limited exposure to external headwinds, like China slowdown and lower commodity prices will help growth

Indian economy will grow at 7.5% in 2016 and 2017 as it is relatively less exposed to external headwinds, like China slowdown, and will benefit from lower commodity prices, Moody's Investors Service said today.

The firm, however, warned that the generally robust economic environment is constrained by "banks' balance sheet repair and elevated corporate debt" and corporate pricing power being limited by the impact on food price inflation and households budgets of two consecutive droughts.

In its report 'Global Macro Outlook 2016-17 - Global growth faces rising risks at time of policy constraint', Moody's said 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.

"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% of India's GDP, compared with net exports worth 1.3%, 3.3% and 4.3% for South Africa, Brazil and Indonesia respectively," it said.

Amid low growth in global trade in goods, India's large services export sector (IT services account for around 18% of total exports) provides another source of resilience.

"Moreover, 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," it said.

Moody's forecast "stable GDP growth at around 7.5% in 2016 and 2017".

The growth rate gap with other G20 emerging markets will be unusually large. "In the five years to the end of the decade, we expect GDP per capita (at market exchange rates) to increase by 34% in real terms in India, compared with only 3.6% in the G20 emerging markets excluding China and India," the report said.

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

The recent measures that now allow 100% foreign ownership in a number of sectors will foster further increases in FDI, it said.

"The 23.55% increase in public sector salaries proposed by the 7th Pay Commission is worth 0.7% 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 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% of GDP objective, thereby mitigating some of the inflationary effects," it said.

Moody's said headline inflation in India will depend on the weather during the planting season, determining food prices. Overall, without particularly unfavourable weather conditions, we estimate that inflation will rise from last year's levels (4.9% on average) but will fall back to the central bank's target of 5% by early 2017. Another year of moderate inflation would help anchor inflation expectations and foster both consumer spending and investment.