Gradual recovery of India's economy projected for FY17 and FY18

To be supported by real disposable income.

Fitch has maintained its GDP growth forecast for India for the fiscal year ending March 2016 (FY16) at 7.5%. Growth is expected to gradually accelerate to 7.7% in FY17 and 7.9% in FY18.

According to a research note from Fitch Ratings, this implies minor downward revisions from the December GEO but leaves India at the top of the global growth ladder. Real GDP growth in 4Q15 was primarily driven by private consumption, while the data showed slowing fixed investment growth and December industrial production declined 1.3% yoy.

The report expects the gradual recovery in FY17 and FY18 to be supported by higher real disposable income, assuming a normal monsoon after two years of below-average rainfall and a substantial wage increase for central government employees.

Here's more Fitch Ratings:

The gradual implementation of the structural reform agenda is expected to contribute to higher growth, even though progress is lacking so far on big-ticket reforms such as the Land Acquisition Amendment Bill and the Goods and Services Tax. Implementation of legislative reforms has so far been difficult given the government’s limited support in the senate (Rajya Sabha), but executive reforms continue to be rolled out.

The Budget for FY17 contained some further announcements of reforms, including measures related to the FDI regime, the financial sector and agriculture, illustrating that the government continues to gradually broaden its reform agenda. Cuts in the monetary policy rate by a total 125bp since the beginning of 2015 are likely to feed through to higher GDP growth, even though monetary transmission is impaired by relatively weak banking sector health.

Fitch expects another 25bp of monetary policy loosening, facilitated by the government’s recent announcement to maintain its fiscal targets for FY17 and FY18. We expect the Reserve Bank of India to remain keen to avoid a significant deviation from the glide path to its inflation target, as it is still building a track record for its new monetary policy framework.