Fitch Ratings cut Indias FY18 GDP growth forecast to 6.7%, says rebound weaker than expected

Days after India's economy showed signs of recovery, Fitch Ratings today cut the country's GDP growth forecast for the current fiscal to 6.7 per cent from the earlier projected 6.9 per cent, saying the rebound was weaker than expected.

It also cut GDP growth forecast for 2018-19 fiscal year to 7.3 per cent from 7.4 per cent predicted in its September Global Economic Outlook (GEO).

Fitch, however, expects GDP growth to pick up in the next two years on back of gradual implementation of the structural reform agenda and higher real disposable income.

"The Indian economy picked up in 3Q17 (July-September), with GDP growing by 6.3 per cent year-on-year, up from 5.7 per cent in 2Q17.

"However, the rebound was weaker than we expected, and we have reduced our growth forecast for the fiscal year to end- March 2018 (FY18) to 6.7 per cent from 6.9 per cent in the September GEO," Fitch said in its latest GEO.

The US-based ratings agency said growth has "repeatedly disappointed" in recent quarters, partly because of one-off factors including the demonetisation programme of November 2016 and disruptions related to the implementation of the Goods and Services Tax (GST) in July 2017.

Reversing a five-quarter slide in GDP growth, Indian economy bounced back from a three-year low to expand by 6.3 per cent in July-September as manufacturing revved up and businesses adjusted to the new GST tax regime.

The GDP growth in the second quarter of 2017-18 compares to 5.7 per cent in April-June, the lowest growth rate since the Narendra Modi government took office, and 7.5 per cent in the September quarter of the previous fiscal.

Stating that it expects GDP growth to pick up in the next two years, Fitch said gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income.

"Recent moves by the government should help support the growth outlook and enhance business confidence," it said.

The two-year bank recapitalisation plan of Rs 2.1 lakh crore, or 1.4 per cent of GDP, is likely to help address the capital shortages that have hindered the banks' lending capacity.

Also, the Rs 6.9 lakh crore, or 4.5 per cent of GDP, road construction plan may encourage the investment growth outlook.

Inflation still running at low levels on muted food prices and rupee appreciating quite sharply against the US dollar since the beginning of this year give headroom for the RBI to keep interest rates quite low in order to help lift the economy, Fitch added.

It said pick-up in global growth has been better than expected and went on to project 3.2 per cent expansion this year and 3.3 per cent next year.

China's slowdown is likely to be only modest, while the stabilisation in commodity prices is helping emerging markets outside China to continue to recover from the sharp downturn in 2015, it said.

China's economy is likely to slow in 2018, but the slowdown is expected to be relatively modest with growth easing to 6.4 per cent from 6.8 per cent this year.