India’s industrial production is expected to be “anaemic” 0.3 per cent for June, partly on account of retailers reducing stocks before the implementation of GST, says a report. Industrial output growth stood at 1.7 per cent in May. Before the implementation of Goods and Services Tax (GST), destocking was triggered largely owing to a steep fall in demand from consumers as they delayed purchases on expectation of getting better price post the new indirect tax regime, the report said. “We expect industrial growth to post an anaemic 0.3 per cent in June, slipping from 1.7 per cent last month (May). Production was likely partly impacted by destocking before July 1 GST implementation,” Bank of America Merrill Lynch (BofAML) said in a research report. It further noted that industrial output gap is unlikely to close any time soon as high lending rates are delaying economic recovery. “It is only when lending rates come off sufficiently that stimulation of demand will lead industrial recovery, exhaustion of capacity and investment, in our view,” it said. On price rise, the report said inflation is expected to be muted even after the ongoing spike in tomato prices and the 7th Pay Commission’s hike in house rent allowances (HRA). “On our part, we advise investors to look through the temporary price spikes in tomatoes due to supply dislocations and similar statistical impact on account of HRA implementation,” the report said. BofAML expects 2017-18 inflation to average 3.7 per cent (excluding HRA hike), still well within the RBI’s 2-6 per cent range. “Inclusive of the statistical impact of the 7th Pay Commission’s hike in house rent allowances, July CPI inflation should work out to 2.5 per cent,” the report said. On account of weak growth and low inflation, the Reserve Bank is expected to cut rates by a final 25 bps on December 6, it noted. The Reserve Bank in its policy review meet this month has lowered its key lending rate by 0.25 per cent, a move which is likely to translate into lower interest rates for home, auto and other loans as also boost economic activity.
The tax-GDP ratio will see an increase of 30 basis points (bps) each in 2018-19 and 2019-20 due to the impact of demonetisaion and the roll-out of the Goods and Services Tax (GST), according to the Medium-Term Expenditure Framework (MTEF) Statement tabled in the Lok Sabha on Thursday. “Going forward in the years 2018-19 and 2019-20, the gains from expansion of the tax base due to the introduction of GST and the increased surveillance post-demonetisation will ensure that tax-GDP ratio will increase by 30 bps in each of these fiscals,” the report said. The tax-GDP ratios are projected to be 11.6 per cent of GDP in 2018-19 and 11.9 per cent of GDP in 2019-20. However, in the current fiscal, the tax-GDP ratio is expected to see no increase over that of 2016-17 and remain at 11.3 per cent, the report noted. “In other words, it is felt that any shocks to tax collections due to the introduction of GST will be absorbed in the current FY and, hence, the tax-GDP ratio will remain at the level of 2016-17,” it said. “It is projected that, in the medium-term, tax revenues will show the growth anticipated during the presentation of the Budget and as estimated in the MTEF Statement,” it said.