India Expects Economy to Rebound This Year
Workers harvest onions on a farm near Umrana, Maharashtra, India. (Photographer: Dhiraj Singh/Bloomberg)

India Expects Economy to Rebound This Year

(Bloomberg) -- India’s chief economic adviser said the government will keep its fiscal deficit under control as it sees a rebound in economic growth from a five-year low.

In a report ahead of Finance Minister Nirmala Sitharaman’s budget speech on Friday, the Finance Ministry said growth will probably reach 7% in the current fiscal year that began on April 1. The government will seek to avoid undermining private investment by widening the fiscal deficit, Krishnamurthy Subramanian, author of the Economic Survey report and chief economic adviser, told reporters Thursday.

“We will be sticking to the fiscal deficit path,” Subramanian said. “If investment, especially private investment, has to get fostered, crowding out can’t happen.”

His comments suggest Sitharaman probably won’t veer much from the government’s projected deficit of 3.4% of gross domestic product for the current fiscal year. Analysts surveyed by Bloomberg had forecast a widening to 3.5% of GDP.

India Expects Economy to Rebound This Year

Sovereign bonds rallied Thursday after Subramanian’s comments, with the yield on 10-year bonds declining by eight basis points to close at 6.75%, the lowest for benchmark notes since October 2017.

The Finance Ministry said political stability will help spur private investment, and risks to growth are evenly balanced. Prime Minister Narendra Modi won a decisive election victory in May, pledging cash handouts to farmers and boosting spending on infrastructure.

“The political stability in the country should push the animal spirits of the economy, while the higher capacity utilization and uptick in business expectations should increase investment activity,” the ministry said in its Economic Survey.

Growth has slowed sharply this year to 5.8% in the first three months of the year, on the back of weak consumption and rising U.S.-China trade tensions. The 7% growth forecast for the fiscal year matches the Reserve Bank of India’s projection and is higher than last year’s expansion of 6.8%.

The central bank has cut interest rates three times this year and pledged more easing to come. The RBI’s action is expected to lower real lending rates, spurring credit growth and investment in coming months, according to the ministry’s report. Further, the narrowing in bad-loans ratio is seen helping boost the capital expenditure cycle.

Consumption, which accounts for about 60% of GDP, will also likely pick up as oil prices stay well below their 2018 peak, it said. However, spending is also closely tied to a recovery in agriculture, which in turn depends on rainfall, the survey said. The other downside risks include weaker exports growth and a spillover of the stress in shadow banking sector to this year.

The southwest monsoon, which waters more than half of India’s farmland, has been below average after a delayed start to the season. As much as 69% of the country got deficient rainfall during June 1-July 2 period, according to the weather office.

“Some regions are expected to receive less than normal rains,” the ministry said, underlining the risks. “On balance, the prospects of the economy should improve.”

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