This week, India will be announcing its gross domestic product (GDP) and balance of payments (BOP) numbers for the March quarter as well as for FY2016. Due to favourable base, India's gross value added (GVA) growth is likely to pick up and the country will also see current account surplus to rise in fourth quarter, its first in past decade, says a research note.
Religare Capital Markets Ltd, in a report says, "We expect GVA growth to pick up to 7.2% in Q4 from 7.1% in December 2015 quarter off a favourable base. On the BOP front, India is set to witness its first current account surplus ($1.9 billion) in a decade in Q4. For FY16, we expect GVA to rise by 7.2% as against the government estimate of 7.3%, while the current account deficit (CAD) to come in at an 11-year low of 1% of GDP led by savings in net oil trade."
As per Ministry of Agriculture’s third advanced estimates, Rabi foodgrain output rose 3.5% despite poor monsoons. This was off a low base as unseasonal rainfall had damaged crops in March 2015. "Given that crops account for around 60% of agri GVA, we expect agri GVA growth to have picked up to 2% in Q4 (Q4FY15/Q3FY16: -1.7%/-1%). Services sector growth is likely to have been resilient at 9.5%," the note added.
Religare pointed out that during the March quarter, India's industrial growth to have slowed down. Led by a double-digit drop in capital goods output, India's manufacturing Index of Industrial Production (IIP) declined by 1.1% in the last quarter of FY2016. Mining activity also inched down due to a sharper fall in natural gas (NG) output and a slower rise in coal production. The report says, "We expect construction to have picked up; cement output rose 11.4% in Q4 (Q3: 4.3%) while steel production was flat after declining in last two quarters. Overall industry growth is likely to have slowed to 6.1% in Q4 from 9% in Q3."
India is likely to see current account surplus in the March quarter. India’s merchandise trade deficit contracted 29.2% YoY ($7.7 billion) to a seven-year low of $18.4 billion in Q4, led by sharply lower gold imports in March due to jewellers’ strike and continued savings in net oil trade on lower crude prices (Q4: -40% YoY). "While we expect invisible earnings to decline on lower remittances and weak service exports, this will be comfortably offset by a drop in merchandise trade deficit. India should thus see a current account surplus of $1.9 billion (0.3% of GDP) in Q4, its first in a decade," Religare added.
During the March quarter, net foreign direct investment (FDI) inflows remained healthy at $9 billion, while foreign institutional investment (FII) flows turned positive after three quarter, mainly due to large inflows in the last month of FY2016. Inflows into non-resident Indian (NRI) deposits surged to $4.3 billion – the highest in two years. Overall, a current account surplus and healthy capital flows would have added about $8.9 billion to reserves. Forex reserves also rose by $6.5 billion during the quarter.
According to Religare, India's CAD-GDP ratio for FY2016, is likely to touch 11-year low. India saved about $29 billion in FY2016 due to lower crude prices. "Due to this, CAD is set to drop to $20 billion, with the CAD/GDP ratio falling to an 11-year low of 1%. We expect capital flows to have halved year-on-year to $44.6 billion in FY2016 on net outflows of portfolio investments. But they would be more-than-sufficient to fund the CAD, leading to an accretion of $23.5 billion during the year," the report concluded.