Goldman Sachs has revised India’s GDP growth forecast to 7.9 per cent from 7.5 per cent for 2016 even as it expects a raft of reforms including the passage of the GST and Bankruptcy Bills. Speaking to Bloomberg TV India, Goldman’s Chief India Economist Tushar Poddar warns of three major risks for the country in 2016 — a China slowdown, Fed rate signal and adverse weather conditions.
How do you see India’s economic growth recovering in the next year?
Our outlook for 2016 for India still remains positive. We think we are in the midst of a cyclical upturn, which extends to 2016. It’s driven by a softer interest rate environment, some government spending and also a pick-up in private consumption. We are already seeing signs of that and we think that is going to continue in 2016. So our growth forecast for next fiscal year is 7.9 per cent, up from 7.5 per cent. So, it is a gradual improvement in activity for next year.
The reforms that I am expecting to see are GST, which is front and centre in everybody’s mind. I want to see a Bankruptcy Code and that law passing through Parliament. I want to see the reforms to the state power distribution companies continue to come through and be implemented. Also, the Monetary Policy Committee of the RBI should be functional. These I would reckon would be the main things I am watching out for. And of course, state-level improvements in both land and labour legislations would also be highly beneficial for the economy.
What risk do you see on GST?
I think what investors are looking for is some signs that it is coming in the near term, which is some point in 2016. But we would like to see it come through as soon as possible and be implemented. Apart from the Constitutional Amendment, the technical requirements passing it through the state legislatures, the GST Council and all of that would need to get accelerated for the GST to come through. And the investors are hopeful that can happen at some point in 2016.
Do you see a threat to medium-term fiscal target because the government has very little room in its fiscal mathematics to support growth into the next year?
On the fiscal deficit target, I think if the government wants to implement the recommendations of the Seventh Pay Commission, then the path of fiscal consolidation that it has outlined (in FY16 Budget) is not going to be easy.
They will have to find cuts elsewhere or hope the economy picks up and tax revenues pick up even stronger than they have.
You see food prices and pricing across the board accelerating. Take us through what that means for the monetary policy.
On inflation, the risk to the upside comes from the severe El Nino conditions that we are facing, which is affecting weather conditions globally and the impact this could have on food prices. Another upside risk comes from the fact that higher growth means that the output gap is going to continue to narrow and in our forecast close at some point in 2016. So core inflation might tend to tick up. Apart from that if the Pay Commission wage hike comes through and if GST comes through, both of them in the short term will be inflationary for the economy. So, there are risks to inflation, which are clearly skewed to the upside.
The Fed rate decision will come up in a week. What’s your expectation and how will it affect capital flows in emerging markets?
We are in a much better shape since the Taper Tantrum of 2013. The Fed rate hike has been well telegraphed. I think it is going to be the pace of Fed normalisation which is going to have an impact rather than the first rate hike itself.
What’s your outlook on the rupee?
The dynamics are that the rupee continues to weaken against the dollar on expectation that the Fed will hike rates. Relative to other currencies, the rupee will be strong.
What are the biggest risks and pitfalls that India has to watch out for in 2016?
A lot of risks for 2016 are external in nature. One of the biggest risks is what is happening in China — if there is a large one-off devaluation of renminbi and if there is a sharper slowdown — that will have a negative impact. If the Fed rate hike is not signalled well and if the US yield curve steepens considerably, that can have a negative impact on India. But I would also add adverse weather conditions as a big risk both globally and especially to India in 2016. We have seen what happened in Chennai.
We need to be aware weather is a known unknown now.