`Gradual recovery on cards, FY`18 GVA growth likely at 6.7%`

New Delhi: The Indian economy is expected to see a gradual cyclical recovery with GVA growth averaging 6.7 percent this fiscal, slightly higher than 6.6 percent in 2016-17, says a Nomura report.

According to the Japanese financial services major, there could be some downside to the RBI's near-term projections.

"In our baseline, we expect some of the growth drag caused by demonetisation and GST to reverse and growth to recover from July-September quarter of 2017," Nomura said in a research note.

It however noted that though its lead indicators are signalling a pick-up in non-agriculture GDP growth, reduced sowing of crops and shortages of working capital since GST implementation suggest a more gradual uptick.

Moreover, investment also continues to hobble due to low capacity utilisation and bank balance sheet stress.

"Hence, we expect a gradual cyclical recovery, with GVA growth averaging 6.7 percent in 2017-18 from 6.6 percent in 2016-17, and GDP growth above 7 percent in 2018," the report noted.

On inflation, the report said it has risen from its trough, but mainly due to supply-side factors (food and GST) or statistical factors (HRA), while the demand-push inflation is largely absent.

"Vegetable prices have moderated again, which should lower headline inflation in October, but we expect core inflation to remain above 4.5 percent due to HRA," the report said adding the average CPI inflation is expected to be above 4.5 percent in 2018.

According to the report, the main risk to this view is weaker-than-expected growth due to the NPA drag and a more prolonged impact from the transitory factors.

Moreover, expenditure pruning by the government to meet its 2017-18 fiscal deficit target could also drag on growth and lead to inflation undershooting 4 percent, the report added.