India’s industrial activity is expected to accelerate in the second half of the current financial year on the back of recovering consumption demand and higher export growth while inflation is likely to ease, according to a CRISIL report released on Friday.
“So far, high food inflation, elevated interest rates and slowing credit growth have impacted consumption recovery. However, with food inflation showing signs of easing, the space for discretionary consumption is expected to increase,” the report states.
Moreover, the rural economy will likely improve following healthy agricultural production this year, it adds.
However, the urban economy is facing waning support from credit growth amid elevated interest rates. A lower fiscal impulse from the government is further expected to have a moderating impact on GDP growth. While the government capex is expected to revive in the second half of this fiscal, growth is likely to moderate relative to the previous fiscal. A revival in private investment is critical to sustain the investment momentum, the report points out.
Global trade is expected to improve and support export growth this year. However, geopolitical tensions remain a risk for trade flows and supply-chain pressures for industry. Exports will have to navigate increased uncertainties arising from the possibility of a US-China tariff war next year, according to the report.
Overall, elevated interest rates and fiscal consolidation are expected to slow GDP growth this fiscal. We expect GDP growth at 6.8 per cent on-year this fiscal compared with 8.2 per cent in the previous fiscal, with risks tilted downwards.
In the coming weeks, we expect food prices to ease sequentially. Vegetable prices tend to come down in December when the kharif crop enters the market. A high base from last year will also help lower inflation since vegetable prices missed their seasonal decline last year. Pressure from edible oil prices, though, will have to be monitored.
Given the subdued domestic demand conditions and soft global prices, non-food inflation is also expected to remain benign for the rest of the fiscal year, as per the report.
“Overall, we expect inflation to soften in the coming months led by food inflation; however, rigidity in vegetable and edible oil prices keep the upside pressure high. In our base case, we expect inflation to average 4.6 per cent this fiscal with some upside bias to the forecast and expect a policy rate cut in February,” the report added.
