CPI inflation could accelerate to an average of 5.1% this year, says Moody’s

India’s gross value added (GVA) growth rate is set to improve to 7.7 per cent this year, from the 7.2 per cent seen in FY16, due to higher domestic consumption demand, while consumer price inflation could accelerate to an average of 5.1 per cent from 4.9 per cent a year earlier, according to Moody’s Investors Service and ICRA.

The ratings agencies also predict a significant reduction in government spending in the coming months since the first four months of this financial year have already seen 74 per cent of the whole year’s budget target being exhausted.
“From ICRA’s perspective, we expect India’s growth-inflation dynamics to display mixed trends during the fiscal year ending March 31, 2017,” Aditi Nayar, Senior Economist with ICRA told reporters.
“Specifically, growth of gross value added (GVA) at basic prices is set to improve to 7.7 per cent from 7.2 per cent in FY2016 on the back of domestic consumption demand, amid a hardening of CPI inflation to an average of 5.1 per cent from 4.9 per cent,” she said. Gross value added is a measure of the value of goods and services produced in the country.
Buffer stock
A favourable base effect, which is likely to continue over the next few months, the increase in the acreage of pulses cultivation, and a bigger buffer stock with the government will all work towards dampening CPI inflation at about the 5 per cent mark, Ms Nayar added.
“Till November we expect a dip in the headline CPI,” Ms Nayar said. “We expect it to be between 4-5 per cent, which could then rise to 5.2 per cent by the end of March 2017.”
The Finance Ministry is to hold a meeting this week with Moody’s officials to seek an upgrade in India’s credit rating of Baa3 positive.
The implementation of the Goods and Services Tax will benefit the economy by boosting revenue collection and improving tax compliance, Marie Diron, Senior Vice President with Moody's Sovereign Group, said at a joint press briefing here.
“Implementation of GST — which Moody’s assumes will become effective in 2017— will enhance revenue collection for the government over time, through better tax compliance and higher profits, as businesses save on tax administration costs,” Ms Diron said.
Ms Diron also highlighted some policy steps already taken by the government that could, if implemented correctly, bolster the economy’s growth potential. These steps include the easing of restrictions on foreign direct investment (FDI) in various sectors, the passage of the bankruptcy law, and the ongoing efforts towards financial inclusion.
However, there remain some impediments to growth, Moody’s and ICRA said.
Growth impediments
“In the nearer term, private investment will remain weak as corporates in investment-intensive sectors are burdened by elevated debt levels,” Ms Diron said. “In addition, the economy will remain vulnerable to fluctuations in monsoon rains, because of partial irrigation of crops and gradual progress in food storage and transport infrastructure.”
Regarding the poorer than predicted overall monsoon, Ms Nayar said that the benefits of the higher rainfall in July have already been seen in terms of higher acreage of land under cultivation and they will offset the any harm from the lower rainfall in subsequent months.