Mumbai: The near-term growth outlook for India seems brighter than last fiscal and the economy is likely to expand at 7.6 percent in 2016-17, the Reserve Bank said Monday.
"Overall GVA (gross value added) growth is projected at 7.6 percent in 2016-17, up from 7.2 percent last year," RBI said in its Annual Report 2015-16.
A better than anticipated agricultural performance and the possibility of allowances under the 7th Pay Commission's award being paid out in the fourth quarter of 2016-17 provide upsides to this projection, it said.
On the other hand, a rise in the implicit GVA deflator, as Wholesale Price Index (WPI) based inflation hardens, will operate as a statistical downside, RBI said.
The effects of Brexit on the Indian economy have been relatively muted, including the immediate impact on equity and foreign exchange markets, it added.
Yet, in view of the linkages to the UK and the euro area, spillovers through trade, finance and expectations channels cannot be ruled out as events unfold, it said.
"Abstracting from these external shocks, the near-term domestic outlook appears somewhat brighter than the outcome for 2015-16," RBI said.
While a durable pick-up in investment activity remains elusive, consumption will continue to provide the main support to aggregate demand and may receive a boost from the revival of rural demand in response to the above-normal and spatially well-distributed southwest monsoon as well as from the seventh pay commission's award, it said.
Industrial activity has been in contraction mode in the early months of 2016-17, pulled down by manufacturing and looking ahead, no strong drivers are discernible at this juncture that could engineer a turnaround.
"Some support to industrial activity may, however, stem from the recent measures taken by the Government such as 100 percent FDI in defence, civil aviation, pharmaceuticals and broadcasting," RBI said.
The headline inflation, it said, is expected to trend towards the target of 5 percent by the last quarter of the year, although at the current juncture, upside risks are prominent.
"If the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation," it said.
RBI said it is also important to take note of impact of the implementation of the Seventh Pay Commission's award on the future trajectory of headline inflation.
The largest effects are expected to emanate from increased house rent allowance in the Consumer Price Index, which may push up retail inflation, which shot up to nearly 2-year high of 6.07 in July.
RBI said the commitment of the central government to the path of fiscal consolidation in 2016-17 has enhanced the credibility of fiscal policy, which will, in turn, help in anchoring inflation expectations and in improving the business environment, including by fostering credibility among international investors.
A conducive environment has also been created through appropriate incentives or penalties for states to renew their fiscal consolidation.
"The passage of the Goods and Services Tax (GST) Bill marks a new era in co-operative fiscal federalism and a growing political consensus for economic reforms," the report highlighted.
It said GST implementation will boost trade, investment and growth by reducing supply chain rigidities, encouraging scale economies, cutting down transportation and transaction costs, as also promoting efficiency gains.
Report said the country's external position is viable and well-buffered to sustain a pick-up in non-oil non-gold imports as growth gathers momentum.
"Nevertheless, the external environment continues to pose challenges stemming from large currency movements, a rising incidence of protectionist measures, swift and massive movements of capital and the amplification of uncertainty by the Brexit vote," it said.
The report said that even as the outlook for capital inflows is optimistic with the recent liberalisation of FDI policy, the repayment of FCNR(B) deposits under the special swap scheme due in September to November 2016 will need to be managed carefully.