Global research agency Fitch on Friday raised India’s growth forecast for the current fiscal to 7.8 per cent from the earlier 7.4 per cent. However, forecast for the next two fiscal, 2019-20 and 2020-21, have been shaved by 20 basis points (100 basis points means 1 per cent) to 7.3 per cent.

Fitch’s latest projection for the current fiscal is higher than what is estimated by the Reserve Bank of India and even the Government. While the RBI’s estimate is 7.4 per cent, the Government feels that it could be 7.5 per cent. However, the International Monetary Fund (IMF) cut its projection to 7.3 per cent from 7.4 per cent. India Ratings too lowered its growth projection by 20 bps to 7.2 per cent.

Fitch has revised the forecast for current fiscal ‘on the back of the better-than-expected 2018 outturn’. It noted that GDP grew at a very fast clip during the first quarter of current fiscal (April-June) at 8.2 per cent ‘sharply exceeding our expectation of 7.7 per cent’.

Powerful base effect

This robust performance was partly attributed to a powerful base effect, with GDP growth dampened during the corresponding period of last fiscal by companies de-stocking ahead of the GST rollout. Underlying activity was robust though, led by a quickening in the manufacturing sector amid surging exports. Exports are partly benefiting from a rapidly depreciating real exchange.

This follows four years of continued real appreciation, which weighed on India’s manufacturing export performance.

The agency advised that fiscal policy should remain quite supportive of growth in the run-up to elections likely to be held in early 2019. The investment/GDP ratio has stopped trending down, helped by ramped-up public infrastructure outlays, in particular by Public Sector Enterprises. The government has also rolled out measured to support low-income earners and rural demand. Despite some recent softening in prices, Fitch sees “inflation picking up to the upper part of the central bank’s target band (4 per cent +/-2 per cent) within the forecast horizon on relatively high demand-pull pressures and rupee depreciation”.

Despite revising the projection upwards, the agency clarified that the economic outlook is “subject to several headwinds including tightening of financial conditions, a rising oil bill and weak bank balance-sheets. The Indian rupee has been the worst-performing major Asian currency so far this year. And despite the central bank’s greater tolerance for currency depreciation, interest rates have been raised by more than anticipated. Tighter financial conditions come against a backdrop of strained banking sector health with non performing assets (NPA) at 10 per cent of loans, it said.

Global Outlook

Meanwhile, the agency cut the global forecast on account of US-China trade war. Global growth rate is estimated at 3.1 per cent, 10 bps less than the earlier projection. Similarly, growth rate for China has also been lowered by 20 bps to 6.1 per cent. “The trade war is now a reality,” Brian Coulton, Chief Economist at Fitch, said while adding that the recently announced imposition of US tariffs on a further $200 billion of imports from China will have a material impact on global growth and, even though 25 per cent tariff shock has been included in global baseline, “the downside risks to our global growth forecasts have also increased”.