Posted on April 18, 2016

QNB Group has published its India Economic Insight 2016  report. The report examines how the implementation of reforms could reinforce India’s status as the fastest growing major economy. According to the report, QNB expects real GDP growth to accelerate from 7.2% in 2016/17 to 7.3% in 2017/18 and 7.5% in 2018/19 as domestic reforms are implemented. Key reforms include unifying goods and services taxes, restarting stalled investment projects and restructuring the banking system.

Reforms and higher foreign ownership limits should encourage the participation of foreign and private investors. Inflation is expected to rise to 5.2% this year, then moderate thereafter on lower food prices. A number of temporary factors are expected to raise inflation in 2016/17. Higher rent inflation due to higher public sector allowances; higher power tariffs; and an increase in the services tax rate. Other factors should keep inflation low over the medium term. A normalisation of harvests should lower food inflation; oil prices should remain moderate; and a new inflation target of 4%

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Fiscal consolidation is planned to continue with the deficit narrowing from an estimated 6.6% of GDP in 2015/16 to 5.2% in 2018/19. Expenditure is expected to fall slightly as lower current spending (mainly due to subsidy cuts on food) offsets higher spending on infrastructure investment. Revenue should rise due to higher excise duties, an increase in the services tax rate and proceeds from telecommunications auctions and privatisations.

Growth in the banking asset is expected to slow to 9.0% in 2016/17 before picking up to 10.0% in 2017/18 and 11.0% in 2018/19 as state banks’  balance sheets are cleaned up and the sector is recapitalised. In 2016/17, the RBI is expected to press banks to address NPLs, which could be a drag on growth and profitability. The government plans to inject USD10.4bn into state-owned banks over the next four years, frontloaded to 2016/17.

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