Union Budget is likely to focus on reviving rural economy

Union Budget is likely to focus on reviving rural economy

D&B ECONOMY FORECAST

Key Economic Forecast

Real Economy: 

IIP is expected to clock in a higher growth level in Dec 2017 as well, due to the low base effect at play. A sustained rise in the capital goods segment and a turnaround in the consumer durables segment is warranted for the industrial activity to revive from hereon. 

The government's thrust to revive the investment cycle and rise in optimism levels amongst businesses for increase in demand levels are expected to support industrial growth going ahead. 

D&B expects Index of Industrial Production (IIP) to grow by 5.5%-6.0% during Dec-17

Price Scenario: 

While the cumulative impact of the reduction in the GST rates on several retail goods and services will translate into lower prices for those products and get reflected in the CPI/WPI commodity basket, inflation rate is expected to scale higher in the near term largely owing to base effect and rising crude oil prices. The factors on the other hand which are building up inflationary pressures are the increases in Housing Rent Allowances (HRA) by the central & state government and the rise in the global crude oil prices besides firming up of households inflationary expectations. 

D&B expects theCPI inflation to be in the range of 5.5%-5.7% and WPI inflation to be in the range of 3.2% - 3.4% during Jan-18, respectively.

Money & Finance: 

Bond yields during the month of Jan 2018 are likely to remain largely unchanged compared to last month. Given that inflation rate will be driven largely by base effect, the policy rate is expected toremain unchanged in the upcoming policy review. This along with the reductions in additional borrowings announced by the government followed by expectations of special dividend from RBI and seasonally strong March quarter for direct tax collections are likely to keep the yields constrained. 

Bonds prices have been under pressure amidst rising crude oil prices and overall inflation, excess supply of debt and concerns of wider fiscal deficit. D&B expects 15-91 day T-Bill yield to average at around 6.0%-6.2% and 10-year G-sec yield at around 7.1%-7.3% during Jan-18.

External Sector: 

Rupee is expected to appreciate further in Jan 2018 as compared to Dec 2017 following foreign investments and rising forex reserves and weak dollar. Favourable interest rate differentials coupled with measures taken to improve ease of doing business, which includes 100% FDI in single brand retail will keep the value of rupee higher than the Dec 2017 levels. D&B expects the rupee to trade in the range of around 63.6-63.8 per US$ during Jan-18.

Detailed Commentary

January 2018

India has been cited as the fastest growing economy in 2018 by various international agencies thereby building up expectations from the government during upcoming Union Budget. We look forward to see the measures that the government takes to address the domestic issues posing risk to India's growth momentum and the manner in which it allocates the resources to critical segments. We expect the pace as well as the initiatives that the government has been taking outside the Union Budget to continue. This year, we believe that the government will take special measures to revive rural economy. A recalibration in the direct taxation would be an added bonanza, provide the government is confident of realizing its revenue via GST and enforcing tax compliance on all. We believe the slippage in the fiscal deficit target for FY18 to be modest given disruption created by two structural reforms, GST and demonetization” said Dr. Arun Singh, Lead Economist Dun & Bradstreet India. “While the impact of high oil prices is not worrying as of now, risks are building up as it becomes widespread through the second and third round impact on inflation and current account deficit. This along with cleaning up of the balance sheet of banks needs to be handled carefully by the government” he added.

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