Indian economy to be hit by global growth slowdown; govt likely to meet annual fiscal deficit target | The Financial Express

Indian economy to be hit by global growth slowdown; govt likely to meet annual fiscal deficit target

Even as India overtook the UK to become the world’s fifth-largest economy, reporting double digit GDP growth in the fiscal first quarter, it is expected to moderate going forward due to global factors.

Indian economy to be hit by global growth slowdown; govt likely to meet annual fiscal deficit target
US Fed's battle to bring inflation under control by aggressively tightening the monetary policy and hiking rates will likely cause more harm to the US and the world economy

Even as India overtook the UK to become the world’s fifth-largest economy, reporting double digit GDP growth in the fiscal first quarter, it is expected to moderate going forward due to global factors. “Global growth slowdown might impinge on domestic macros sooner or later,” analysts at Bank of Baroda said in a research note. According to the BoB report, the central government will meet its fiscal deficit target for this year. Several economists are of the opinion that the US Fed’s battle to bring inflation under control by aggressively tightening the monetary policy and hiking rates will likely cause more harm to the US and the world economy. Growth of emerging markets and developing economies such as India will be hampered as the dollar will climb in response to higher US rates.

Growth impulses remain strong

Last month at the Jackson Hole Symposium, Fed Chair Jerome Powerll hinted at a faster pace of rate hike to control inflation. As a result, markets became volatile and global yields edged up. RBI’s comments on inflation passing its peak also allayed fear. On the growth front, domestic indicators remained broadly buoyant as PMI print, credit demand, GST, electronic imports and toll collections showed a pick up. India’s manufacturing and services PMI in the month of August signal a continued momentum in activity supported by strong demand and easing price pressures, according to the report. Further, South-West monsoon has progressed well, and storage levels in reservoirs are adequate. However, with several parts of Eastern and Northern India receiving deficient rains, kharif sowing has been impacted and is 13.7% lower compared with last year. This has been led by lower sowing of rice and pulses.

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Centre likely to fiscal deficit target for this year

Supported by a drop in overall spending in July, and buoyant revenue growth, the government recorded a surplus of Rs 11,040 crore. With this, the fiscal deficit came down to 6.3% of GDP as of July 2022 versus 6.6% as of Q1FY23. On the expenditure side, overall growth slowed to 12.2% in FYTD23 as against 15.4% in Q1. This was led by a sharp slowdown in revenue spending. Capex, on the other hand, remains strong. Another positive was tax collection revenue as the government’s gross tax revenues rose by 24.9% in FYTD23, up from 22% growth reported in Q1, led by pick up in direct tax collections. Indirect tax collections remained broadly stable. Centre’s net revenues also rose sharply by 12.9%, compared with 5% in Q1FY23. “We believe centre will meet its fiscal deficit target for this year,” analysts said.

August inflation to remain steady

Post Jackson Hole Symposium, global yields rose sharply, with US 10Y yield rising as much as 54bps in August. This was driven by hawkish comments from the Fed Chair signalling aggressive pace of rate hike. India’s 10-year yield however, was an anomaly and fell by 13 bps last month. This was supported by declining crude prices. Apart from this, comments from central bank officials that inflation has peaked, and is likely to get anchored in the coming months, also comforted yields. Bank of Baroda analysts estimated August inflation to come in at 6.7%.

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Rupee to remain under pressure

The India rupee came under renewed pressure after US Fed Chair’s hawkish speech at the Jackson Hole Symposium. In fact, INR briefly breached the 80 per dollar mark but saw a correction, supported by RBI’s active intervention. However, with rising external headwinds in the form of a stronger dollar and weakening export momentum, outlook for INR remains dim. “Apart from this, higher rates in the US may spur a fresh bout of FPI withdrawals from India which again also weigh on INR. On the positive side, oil prices may see some correction as higher rates tip the global economy into a slowdown if not recession,” analysts said adding that overall, rupee is expected to trade in the Rs 79.75-80 per dollar range in the near-term.

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