Wednesday, January 11, 2017

Growth prospects for Nepal and India in FY2017

Here are the major highlights from Global Economic Prospects January 2017:

Global growth is estimated at 2.3% in 2016 and is projected to grow marginally to 2.7% in 2017 due to “receding obstacles to activity in commodity exporters and solid domestic demand in commodity importers”. 
  • Increasing policy uncertainty in major economies (particularly in the US and Europe), financial market disruptions (amidst tighter global financing conditions) and weakening potential growth are some of the downside risks.
  • Fiscal stimulus in the advanced economics could push GDP growth up. 
  • Weak investment and productivity growth are affecting medium-term prospects. Structural reforms to boost potential growth (support domestic demand and reinvigorate investment) should be a medium-term priority. In advanced economies, low or negative real equilibrium interest rates constrain effectiveness of monetary policy and may necessitate supportive fiscal policies.
  • Investment in human and physical capital is essential to meet the skills and infrastructure needs to support long term growth. Other measures include rebuilding policy space, addressing vulnerabilities, and enhancing international integration (trade and FDI).
  • Commodity prices, particularly oil, are expected to increase. Agricultural prices are projected to remain stable as maize, wheat and rice stocks are at high levels.

  • Indian economy is expected to grow at 7.0% in FY2017 (ending on 31 March 2017), 7.6% in FY2018 and 7.8% in FY2019 and FY2020. Higher infrastructure spending, strong demand-led manufacturing activity, and regulatory reforms will support growth till the medium term.  
  • The demonetization shock in India affected growth prospects in the third quarter. Fourth quarter growth is affected by weak private sector investment (excess capacity, corporate deleveraging and credit constraints). 
    • Demonetization may be beneficial over the medium term because of liquidity expansion, which will help to lower lending rates.  
  • High growth up to second quarter of FY2017 was “underpinned by robust private and public consumption, which offset the slowing fixed investment, subdued industrial activity and lethargic exports”. Consumption was supported by low energy costs, increases in public sector wages and pension and favorable monsoon (which boosted rural and urban incomes).
  • Reduction in administered prices and low energy costs eased inflationary pressures. 
  • South Asian regional growth is estimated at 7.1% in 2017 and 7.3% in 2018 supported by robust domestic demand

UPDATE (2017-01-17): In its WEO Update January 2017, the IMF trimmed India's GDP growth for FY2016/17 to 6.6% (one percentage point lower than its October 2016 forecast) and 7.2% for next fiscal year (0.4 percentage point lower than its October 2016 forecast), thanks to the demonetization shock.

  • Nepalese economy is expected grow at 5.0% in FY2017 (ending 15 July) and 4.8% in FY2018. 
    • Favorable monsoon and expected acceleration post-earthquake reconstruction will underpin growth along with the normalization of trade after the four-and-a-half-month long border blockade.
    • Deceleration of remittance inflows may constrain consumption and investment. Medium-term growth will be supported by continued post-earthquake reconstruction, uptick in manufacturing activity, and favorable tourism activities. 
  • Surge in post-earthquake reconstruction related imports and deceleration of remittances will worsen current account balance.
  • Demonetization shock spillovers from India to Nepal, through trade and remittance channels may affect growth.

UPDATE (2017-01-24): In its latest assessment, the IMF has projected Nepal’s GDP to grow at 5.5% in FY2017 and inflation to undershoot the target.

The mission expects growth to reach 5.5 percent in FY 2016/17 (ending July 15). The normalization of economic activity is being supported by a good monsoon, accommodative monetary policy, and rising government spending. India’s sudden withdrawal of high-denomination banknotes is expected to have a limited impact on activity overall; bank holdings of Indian rupee currency are small but some corporates and households who hold such notes have seen their purchasing power affected. The main risk to the outlook pertains to failure of capital budget implementation to improve.
The normalization of prices in the aftermath of last year’s trade disruption is pushing down inflation which is expected to undershoot the authorities’ mid-2017 inflation target of 7.5 percent.