New Delhi: The Indian economy is expected to see a gradual cyclical recovery with gross value added (GVA) growth averaging 6.7% this fiscal, slightly higher than 6.6% in 2016-17, says a Nomura report. According to the Japanese financial services major, there could be some downside to the RBI’s near-term projections.

“In our baseline, we expect some of the growth drag caused by demonetisation and GST to reverse and growth to recover from July-September quarter of 2017," Nomura said in a research note. It however noted that though its lead indicators are signalling a pick-up in non-agriculture GDP growth, reduced sowing of crops and shortages of working capital since GST implementation suggest a more gradual uptick.

Moreover, investment also continues to hobble due to low capacity utilisation and bank balance sheet stress. “Hence, we expect a gradual cyclical recovery, with GVA growth averaging 6.7% in 2017-18 from 6.6 per cent in 2016-17, and GDP growth above 7% in 2018," the report noted.

On inflation, the report said it has risen from its trough, but mainly due to supply-side factors (food and GST) or statistical factors (HRA), while the demand-push inflation is largely absent. “Vegetable prices have moderated again, which should lower headline inflation in October, but we expect core inflation to remain above 4.5% due to HRA," the report said adding the average CPI inflation is expected to be above 4.5% in 2018.

According to the report, the main risk to this view is weaker-than-expected growth due to the NPA drag and a more prolonged impact from the transitory factors. Moreover, expenditure pruning by the government to meet its 2017-18 fiscal deficit target could also drag on growth and lead to inflation undershooting 4%, the report added.