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India is expected to grow at 7.4% this year

Lagged effect of demonetisation on the economy is quite puzzling

Investment in India has been weak in recent years

 

Gross Domestic Product (GDP) or India's economic growth is expected to rise by 7.4% and 7.6% in the next two fiscal years, Fitch Ratings said on Tuesday in its Global Economic Outlook report. 

It said, "Public spending on infrastructure is also set to rise, boosting investment. This should help drive a pick-up in GDP growth, which we forecast at 7.4%-7.6% in the next two fiscal years. CPI inflation should also tick up as the current low food price effect will fade, but we expect CPI to remain firmly within the central bank’s target range."

Fitch Ratings said that demonetisation did have a material impact on the Indian economy which slowed down to 6.1% GDP growth rate in the last quarter of the fiscal ended March 31, 2017 registering slowest growth since fourth quarter of financial year 2014.

It said, "It appears that the cash squeeze of November 2016 – whereby the government pulled 86% of cash in circulation out of the economy virtually overnight – finally did have a material impact on spending. This lagged effect of demonetisation on the economy is quite puzzling – as the effects would be expected to be quite rapidly felt – but partly reflects the challenges of measuring spending in an economy with a large informal sector."

"We expect investment to gradually pick up from current lows, on the back of the transmission of supportive monetary policy of the past two years and stepped-up structural reforms. The goods and services tax, expected to be applicable from July of this year, will facilitate trade within India and reduce transaction costs," Fitch Ratings said. 

Global Economy

Fitch Ratings said that recovery in global growth is strengthening and is expected to pick up to 2.9% this year and peak at 3.1% in 2018, highest rate since 2010. 

"Faster growth this year reflects a synchronised improvement across both advanced and emerging market economies. Macro policies and tightening labour markets are supporting demand growth in advanced countries, while the turnaround in China's housing market since 2015 and the recovery in commodity prices from early 2016 has fuelled a rebound in emerging market demand," said Brian Coulton, Fitch's Chief Economist.