Union Finance Minister Arun Jaitley will present Budget 2016 on 29 February, amid the World Bank projecting India's GDP growth at 7.8% in FY2017 in its 6 January report, but Bank of America-Merrill Lynch (BofA-ML) says growth will depend on three triggers.
The implementation of the recommendations of the 7th Pay Commission, a 50-bps rate cut by the Reserve Bank of India (RBI) and the rollover of $26 billion of 2013 FCNR deposits in case FII inflows ebb, hold the key to 7.7% in fiscal 2017, according to a BofA-ML note.
The FCNR deposits are maturing this year, and in case of a decline in FII inflows, the RBI would have to roll over the deposits, even while saying the situation is not so alarming, after factoring in crude oil prices at around $53 per barrel.
"Even at $53.3/barrel in FY17, the RBI is running a not-so-high one-year forward nine-month import cover. Further, FPI debt and equity investments have risen to 121% of FX reserves from 72% in December 2007," the note said.
At the same time, the report flags three concerns — unrealistic expectations from reforms, delayed recovery from capital expenditure and RBI's inability to cut rates beyond 25 bps, given the still-high rate of retail inflation.
The note put a caveat to the 0.7% increase expected from the implementation of the 7th Pay Commission proposals — the government relaxes its fiscal deficit target for FY2017 to 3.9% of GDP as against 3.5% committed earlier by Jaitley.
The pay panel proposals are expected to have a financial impact of Rs 1 lakh crore in 2016-17.
