India Economy Likely to Expand 7.6% in 2016-17

India’s economy is likely to expand at 7.6 per cent in 2016-17, according to the Reserve Bank of India's Annual Report 2015-16. Overall gross value added (GVA) growth is projected at 7.6 per cent in 2016-17, up from 7.2 per cent last year.

The RBI noted that the impact of Brexit on the Indian economy have been relatively muted, including the immediate impact on equity and foreign exchange markets. "Abstracting from these external shocks, the near-term domestic outlook appears somewhat brighter than the outcome for 2015-16," RBI said.

The RBI also said that industrial activity has been in contraction mode in the early months of 2016-17, pulled down by manufacturing and there seems to be no strong drivers that could engineer a turnaround.

The headline inflation, it said, is expected to trend towards the target of 5 per cent by the last quarter of the year, although  upside risks remain.

"If the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation," it said.

RBI said the commitment of the central government to the path of fiscal consolidation in 2016-17 has enhanced the credibility of fiscal policy, which will, in turn, help in anchoring inflation expectations and in improving the business environment, including by fostering credibility among international investors.

A conducive environment has also been created through appropriate incentives or penalties for states to renew their fiscal consolidation.

GST Bill marks a new era

"The passage of the Goods and Services Tax (GST) Bill marks a new era in co-operative fiscal federalism and a growing political consensus for economic reforms," the report highlighted.

It said GST implementation will boost trade, investment and growth by reducing supply chain rigidities, encouraging scale economies, cutting down transportation and transaction costs, as also promoting efficiency gains.

The report said the country's external position is viable and well-buffered to sustain a pick-up in non-oil non-gold imports as growth gathers momentum.

"Nevertheless, the external environment continues to pose challenges stemming from large currency movements, a rising incidence of protectionist measures, swift and massive movements of capital and the amplification of uncertainty by the Brexit vote," it said.

The report said that even as the outlook for capital inflows is optimistic with the recent liberalisation of FDI policy, the repayment of FCNR(B) deposits under the special swap scheme due in September to November 2016 will need to be managed carefully.