{LONGTERMINVESTORS} Fwd: India Economic Survey FY2016: Cautious tone amid fragile global conditions

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From: <research@icicibank.com>
Date: Fri, Feb 26, 2016 at 7:38 PM
Subject: India Economic Survey FY2016: Cautious tone amid fragile global conditions
To: stockdesai@gmail.com

India Economic Survey highlighted that domestic consumption kept India's growth story positive in a globally weak environment The Survey focused on need for addressing the challenge of stressed PSU and corporate balance sheets to aid private investment and reach economic growth potential We expect the Government to remain committed to the fiscal consolidation road map; Union Budget due Monday is likely to put forth FY2017 fiscal deficit target at 3.5% of GDP FY2016 India growth story positive; pegs FY2017 growth at 7-7.75% The Economic Survey said that in a weak global scenario, India's growth has been largely positive on the back of consumption. Industry growth is estimated to have accelerated while services growth remained robust. Growth in agricultural slackened due to two successive years of below average monsoon. The Survey pegged FY2017 growth at 7.0-7.75% (GDP at market prices), lower than its potential GDP growth of 8-10%, on the assumption of a favourable monsoon and possible boost to consumption from implementation of 7th Pay Commission (7PC). However, weakness in global demand and drag on consumption from a rise in oil prices were cited as key risks to this outlook. Need to address the twin balance sheet (TBS) challenge The Economic Survey quoted TBS (i.e., the impaired financial positions of the Public Sector Banks (PSBs) and some large corporate houses) as a critical impediment to private investment and full-fledged recovery in the Indian economy. Solving this challenge would require the 4 Rs: Recognition (valuing assets as close to their true value as possible), Recapitalization (safeguarding capital positions via say, infusion of equity), Resolution (selling/rehabilitating stressed assets), and Reform (setting incentives to prevent future repetition of the problem). Survey suggests adherence to 3.5% of GDP FY2017 fiscal deficit target While the Survey indicated that the current fiscal target 3.9% of GDP remains comfortable, it suggested that the Government should stick to its FY2017 fiscal deficit, thereby reinforcing its credibility. The high debt-to-GDP ratio of the consolidated Government strengthens the case for the same. The Survey highlighted 2 key risks to the fiscal: implementation of the 7PC and increased public spending to meet pressing infrastructure needs. Survey highlights limited impact of 7PC on inflation The Economic Survey emphasised on the limited impact of 7PC on inflation stating both historical and theoretical analysis. The survey showed that despite the lumpiness (and magnitude of the wage bill), the 6PC barely registered on inflation. However, it should be noted that the study was a point-analysis at the time of grant of arrears. So while no stark impact was seen on inflation in September 2008 (phase I, 6PC) and September 2009 (phase II, 6PC); the rise in inflation over the period remains significant. The FY2017 CPI inflation is projected between 4.5%-5.0% amid subdued oil prices, expected return to normal monsoon and widening output gap (on below potential GDP growth). Survey states room for further monetary accommodation The Survey states that with the possibility of RBI's March 2017 5% CPI inflation target being comfortably met (and possibility of undershooting), there is room for further accommodation. This should be done in two ways: (1) Easing liquidity conditions (aiding pass-through of policy) and (2) Lowering interest rates (consistent with the inflation target while supporting growth and corporate balance sheets. On balance, we expect the Government to remain committed to the fiscal consolidation road map and we continue to maintain our call of a post budget rate cut. The detailed highlights of the Chapters are provided in the Annexure Please refer to the attached document for a detailed report. Regards, ICICI Bank : Treasury Research Contact: Niharika Tripathi +91 22 4008-6943 niharika.tripathi@icicibank.com Sagrika Gogia +91 22 4008-2180 sargika.gogia@icicibank.com Sonal Surana +91 22 4008-2087 sonal.surana@icicibank.com Radhika Wadhwa +91 22 4008-2085 radhika.wadhwa@icicibank.com ​

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CA. Rajesh Desai

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