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Economy to do well in near term despite US rate hike fears: Experts

business Updated: Dec 15, 2015 23:56 IST
Indian economy

Even as the global economy continues to grapple with recession, the economy is likely to grow by 7.9% next fiscal year despite negatives stemming from a probable US rate hike, including Credit Suisse, DBS, Goldman Sachs have said.

India will be one of the few emerging market economies to perform well as public private investment cycle will pick up mainly due to strong domestic demand and higher capital spending by the government. Much of this upturn will be driven by local consumption fuelled by jump in incomes of nearly 40% of the formal sector employment, from a proposed salary hike for over 34 million employees.

The encouraging outlook comes even as equity and currency markets feel the jitters from the likely fallout of a sell-off from foreign portfolio investors who may pull back funds if the US Fed raises interest rates on Wednesday.

“There have been certain positive indicators, which point at an economic pick-up,” said Neelkanth Mishra, India equity strategist for Credit Suisse. “Oil demand growth was very strong in September and October with the annual growth being the highest in 11 years. Auto demand was also strong in November.”

Rise in oil consumption and auto sales typically indicate an increase in spending by consumers, both urban and rural. This is likely to be supported by about 27% rise in salaries which would result in a `4.5 trillion stimulus, which is almost about 2.8% of the GDP.

Last month, the Seventh Pay Commission recommended a 24% hike in pensions, which has also led the RBI to monitor its impact on inflation.

Goldman Sachs India’s MD Tushar Poddar said lower interest rates, greater FDI inflows and the improvements in the ease of doing business will provide the push for growth. “There is going to be a positive impact from the government’s higher spends on rails and roads. Sectors such as manufacturing, telecom and retail may also attract foreign investment, while there may be some cautious inflows once the US raises rates,” he said.

Barclays’ research analysts Sidharth Sanyal and Rahul Bajoria said while GDP growth data has fluctuated, “the trend of gradual improvement in overall economy remains on track. Improved power generation, stronger mining output, greater fiscal devolution to states, among other factors, are supportive of a recovery. We see various policy initiatives having a effect in the next 6-18 months.”