Economy report. CRISIL revises India’s GDP forecast for FY23 down from 7.3% to 7%

CRISIL has revised its forecast for India’s real gross domestic product (GDP) growth to 7 per cent for the current fiscal (2022-23) from 7.3 per cent estimated previously.

The credit rating agency said this is primarily because the slowdown in global growth has started to impact India’s exports and industrial activity.

However, domestic demand remains supportive this fiscal, helped by a catch-up in contact-based services, government capital expenditure (capex), relatively accommodative financial conditions, and overall normal monsoon for the fourth time in a row.

The impact is expected to be more next fiscal (2023-24) as global growth decelerates faster, said a team of CRISIL economists headed by Dharmakirti Joshi, Chief Economist.

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Additionally, domestic demand could come under pressure as interest rate hikes get transmitted more to consumers, and the catch-up in contact-based services fades, the agency said in its ‘Market Intelligence & Analytics’ report.

Consequently, CRISIL expects India’s GDP growth to slow to 6 per cent in fiscal 2024, down from the 6.5 per cent estimated previously. The risks to the forecast remain tilted downwards, as per the report.

India to remain growth outperformer

The agency assessed that despite the markdown in near-term growth, India is expected to remain a growth outperformer over the medium run.

CRISIL expects India’s GDP growth to average 6.6 per cent between fiscal 2024 and 2026, compared with 3.1 per cent globally — as estimated by the International Monetary Fund (IMF).

India would also outgrow emerging market peers such as China (4.5 per cent growth estimated in calendar years 2023-2025), Indonesia (5.2 per cent), Turkey (3 per cent), and Brazil (1.6 per cent).

The economists emphasised that stronger domestic demand is expected to drive India’s growth premium over peers in the medium run.

“Investment prospects are optimistic given the government’s capex push, progress of Production-linked Incentive (PLI) scheme, healthier corporate balance sheets, and a well-capitalised banking sector with low nonperforming assets (NPAs),” they said.

India is also likely to benefit from the China-plus-one policy as global supply chains get reconfigured with a shifting focus from efficiency towards resilience and friend shoring.

Private consumption (about 57 per cent of GDP) will play a supportive role in raising GDP growth over the medium run.

Retail inflation

While consumer price index-based inflation has remained elevated at 7.2 per cent, above the RBI’s upper tolerance band of 6 per cent, in the first half of this fiscal, CRISIL expects it to moderate for the remainder of the fiscal as the base effect takes hold, and on the expectation of healthy rabi crop. However, risks to inflation remain.

For the full fiscal, the agency expects CPI inflation to average 6.8 per cent on-year, with fourth-quarter inflation likely printing below 6 per cent.

For fiscal 2024, CRISIL expects CPI inflation to come down, averaging 5 per cent on-year, within the RBI’s target range of 4- 6 per cent.

The economists reasoned that a combination of three factors — the impact of rising interest rates on domestic demand, a global demand slowdown leading to falling international commodity prices, and the base effect — should lead to lower inflation.

Monetary policy: Pause?

The agency noted that a reading of the Monetary Policy Committee minutes from the September meeting suggests a few members arguing that a pause may be needed soon in the rate hike cycle to evaluate the lagged impact of the hikes so far.

This suggests that monetary policy actions may be less synchronous in the coming months with advanced economies staying aggressive by tightening, while Central banks in some emerging market economies (including India) stepping off the gas.