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Four reasons why Goldman is upbeat about India

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The world's fastest-growing major economy is set to accelerate in the current fiscal year, according to Goldman Sachs.

India's economy is set to grow by 7.9 percent on-year between April 2016 and March 2017, accelerating from 7.6 percent in the previous year, the investment bank said in a note on Tuesday.

That growth figure, if achieved, would put India well above China, which is expected to expand at a more modest pace this year, with the Chinese government aiming for growth of 6.5 to 7 percent.

Goldman highlighted the following factors that are expected to support India's growth in the coming months.

A better monsoon

Weak irrigation infrastructure means the level of rainfall affects much of India's agrarian economy and rural incomes and consumption. Lack of rain tends to push up food prices, which in turn affects the consumer price index.

India's meteorological department predicted rainfall to be 6 percent above normal this year, said Goldman, which could add 0.6 to 0.9 percentage points to overall gross domestic product (GDP) growth in fiscal 2017 through an increase in agriculture GDP growth and rural incomes.

In its latest update last week, the Indian Meteorological Department said rainfall activity was likely to increase over peninsular India from the last week of August.

Wage hikes for civil servants

In late June, India approved a more than 14 percent increase in salaries and pensions for about 10 million government employees and pensioners, which is expected to cost nearly $17 billion in fiscal 2017, according to Reuters.

Goldman said this one-off move will add to the purchasing power of consumers and could see GDP growth get a 0.30 percentage point boost.

Favorable policy mix

India's fiscal and monetary policy mix is also favorable and it provides a "conducive environment for growth." On the monetary front, the Reserve Bank of India (RBI) cut the repo rate by 0.25 percentage points to 6.50 percent in April.

Goldman said the policy rate cuts could lead to an increase in demand for credit from the relatively unlevered household sector; it said retail loan growth has increased to 19 percent on-year in the first quarter of fiscal 2017, from an average of 15.7 percent in the 2015-2016 fiscal year.

Recovery in loan growth from companies, however, might be limited due to the on-going issue of non-performing loans in India's public-sector banks and the high number of companies that are heavily in debt.

In its federal 2016-2017 budget announced earlier this year, India allocated 878 billion rupees ($13.1 billion) for the rural sector and allocated 359.8 billion rupees for agriculture and farmers' welfare.

Goldman said the focus on rural spending in this year's budget could support public capital expenditure.

Progress on reforms

Passing key reforms had been one of the sticking points of Prime Minister Narendra Modi's government since it came into power two years ago, although recent developments have been encouraging.

Earlier this month, the Indian parliament approved the much anticipated tax overhaul reform, which would simplify the country's current taxation system.

Source: Goldman Sachs Global Investment Research

This was one of four key reforms Goldman expected to pass in 2016; others include the bankruptcy code which is set to make it easier to recover debts from failed business, and the setting up of a monetary policy committee, which is currently underway.

The government has also undertaken other measures including the ease of doing business, uptick in infrastructure investment and easing of FDI restrictions in key sectors like defence and aviation, which are likely to improve India's outlook.

Goldman also highlighted some key risks that could potentially derail India's upbeat economic trajectory, including a faster pace of rate hikes from the U.S. Federal Reserve, renewed concerns over China and worsening of India's non-performing loans situation.

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