India's growth prospect is likely to see a slowdown in the next two years followed by recovery in the medium term, with 2019-20 GDP expected at around 7.6 per cent, says a report by HSBC.
According to the global financial services major, India's growth story has a two-part narrative. The first is a slowdown and gradual recovery in the short run, likely over 2017-18 and 2018-19 as key sectors revive from disruptions related to the implementation of the goods and services tax (GST).
The subsequent narrative is of brighter growth prospects in the medium term (2019-20 and beyond), HSBC said in the report adding that "we forecast growth at 6.5 per cent, 7 per cent and 7.6 per cent over 2017-18, 2018-19 and 2019-20 respectively".
In the medium term, GST alone may add 40 bps to GDP growth through productivity gains, it noted.
The report further said "if the other side of India's twin balance sheet problem overleveraged companies lingers for longer, the pace of the investment revival and GDP recovery could suffer".
Moreover, inflation may begin to rise as growing consumer demand hits the wall of supply-side constraints, it noted.
Regarding India's current account deficit (CAD), HSBC said it is set to widen to 1.7 per cent in 2017-18 and to 1.9 per cent in 2018-19, and then reach 2.1 per cent in 2019-20 led largely by rising imports of oil and items such as electronic goods and smartphones, reflecting changing consumer preferences domestically.
"On the fiscal front, there are upside risks to the central government's 3.2 per cent deficit target emanating from lower-than-budgeted nominal GDP growth, a lower-than- budgeted RBI dividend, and a higher seventh pay commission bill," it noted.