Despite recession fears looming globally, the Indian economy grew at 13.5% in Q1FY23. Some economists believe that at this rate, India is likely to be the fastest growing economy in the current fiscal. However, analysts at Edelweiss Securities expect the global downturn to hamper India’s growth as well. The brokerage in its report said domestic slowdown looms as macro vulnerability risks give way to demand, profitability concerns. Faltering exports, credit/capex growth stalling, organised businesses seeing a bigger hit than MSMEs could also slow down the pace of growth. As RBI is forced to tighten monetary policy in an incomplete recovery; analysts expect the repo rate to peak under 6% which may dampen growth. The brokerage and research firm estimated India’s FY23 GDP growth at 6.4%.
“We cut our FY23E GDP estimate by 60bp to 6.4% and lower USD/INR forecast to 80 from 78 earlier. Policy easing may be delayed given high inflation experience and over-indebted sovereigns. Quick easing of energy shock may mitigate the downside,” Edelweiss said in its report. The brokerage believes that as slowdown looms, one has to look beyond exports because to think that the global downturn will hit only India’s exports is shortsighted. “The domestic credit and capex cycles too would run into resistance as the global/BoP shock is upending the domestic policy set-up,” it added.
FY23 GDP estimate cut to 6.4%; Repo rate may peak under 6%
Liquidity, demand, and prices which are the typical props of credit creation are turning adverse, according to analysts. Amid this, the capex outlook is not looking positive either. The uptick in order books could slow down going forward. “We have been here before (2018– 19). Our lead indicators for credit/capex have already rolled over. Commodities fall will bode well for India’s macros (CPI/CAD), but spells trouble for the business cycle (GDP/earnings),” Edelweiss noted. The research firm cut its FY23 GDP estimate by 60bp to 6.4% on-year. Analysts believe that repo rate may peak under 6%, and persistence of global energy shocks poses risks in near-term.
Falling commodity prices should ease core goods, energy inflation
According to the report, commodities impact India at two levels – macro-vulnerability level (inflation, CAD/fiscal deficit) and business cycle level (GDP, earnings, taxes). Analysts argue that commodities fall, if persists, augurs well for India’s macro-vulnerability situation – inflation/CAD ease but it means trouble for business cycle i.e. NGDP, earnings, taxes slow down. “We show this to be historically true and we expect this time to be no different,” they said. Going ahead, falling commodity prices should ease core goods as well as core energy inflation.
Tax collections may slow down
The government has been one of the biggest beneficiaries of higher prices over the last two years, according to Edelweiss. “While high prices make for bad headlines, they do fill government coffers. Taxes, both direct and indirect, are collected at nominal rather than real variables. It is higher prices and tax hikes on fuel that explain the strong recovery in overall tax collections. In fact globally, governments’ tax collections are running strong, helped by high inflation. If inflation slows, it would hit tax collections,” it said.
India’s macro-vulnerability to impact exports, domestic demand
Overall, analysts think global commodity prices are headed lower over coming months, and this would work to lessen India’s macro-vulnerability which is the key concern today. On the other hand, they expect concerns around the business cycle to start building up in coming quarters (NGDP, tax revenue, corporate earnings, etc). “Critically, these concerns would not just be limited to exports, but would likely spread to domestic demand,” they said.