India’s GDP for the quarter ended June 30, 2022 (Q1FY23) rose 13.5 per cent on-year. While India’s April-June economic growth in double digits was on expected lines, it fell short of some high estimates as many analysts had expected growth at around 15-16% in the first quarter of the current fiscal due to the base effect. According to economists, growth will slow down in the next few quarters on account of fading base effect. Global drags including elevated crude prices, shrinking corporate profitability, tight monetary policies, aggressive rate hikes, recession fears, inflation and diminishing global growth prospects also weigh on India’s growth outlook. However, strong macroeconomic fundamentals may lend support to the growth momentum.
Growth to slow down in next few quarters
“First-quarter GDP growth came in lower than expected. High net imports and weaker government consumption expenditure kept overall growth soft. Private consumption is improving, with urban demand getting support from contact-intensive services. Had it not been for high inflation and subdued rural demand due to negative real rural wage growth, private consumption would have grown faster. The next few quarters will see slower growth as the base effect wanes. While the ongoing broad-basing of domestic economic activity is supportive, the key risks is slowing global growth, which would curb India’s exports and create uncertainty in private capex plans. These would put downward pressure on our GDP growth forecast of 7.3% for the current fiscal, ” said Dharmakirti Joshi, Chief Economist, CRISIL.
Primary headwinds going forward: Widening trade deficit, elevated input costs
According to Vivek Rathi, Director – Research, Knight Frank India, India’s economy would face headwinds in the coming months primarily arising from widening trade deficit as a result of decelerating exports amid global demand slowdown. Additionally, the investments in India could take a hit due to tightening borrowing costs and elevated input costs. “However, we are optimistic about India’s economic outlook as the early indicators such as manufacturing PMI, GST collections etc. in the last few months have remained strong albeit global turbulences,” Rathi said.
Economic, real estate sector outlook optimistic
India’s economy grew steadily despite global recessionary trends due to the ongoing geopolitical crisis and highly volatile global financial market. The data shows some base effect, but overall recovery was aided by growth in the core sectors coupled with pent-up demand in various sectors like real estate, retail and hospitality, and enhanced personal mobility, according to Anshuman Magazine, Chairman & CEO – India, South-East Asia, Middle East & Africa, CBRE. “Continued expansive vaccination coverage also supported the progress of the recovery. We remain optimistic about the economic outlook and the real estate sector,” he said.
Growth to moderate in Q2 FY2023
GDP growth will certainly moderate in Q2 FY2023, as the base effect normalises, according to Aditi Nayar, Chief Economist, ICRA. An uneven monsoon is likely to weigh upon agri GVA growth and rural demand going forward. However, a robust demand for services, and some easing in the commodity price-inflicted pain for producers should support on-year GDP growth of 6.5-7% in the ongoing quarter, and 7.2% for the year as a whole, Nayar noted. “We foresee modest downside risks to the NSO’s initial estimate of 12.7% GVA growth in Q1 FY2023, on account of potential downward revisions in the agricultural performance from the current level of 4.5%,” she said.
GDP growth may remain at 7% for the year
The GDP print for 1QFY23 was largely in line with Emkay Global’s expectations, growing 13.5%, led by recovery in the services sector. The sharp uptick of around 26.7% in nominal GDP essentially reflects the higher deflator, according to Madhavi Arora, Lead Economist, Emkay Global Financial Services. “Going ahead, we see secular downturn in the growth print ahead, as the base effect fades and the economy also slows sequentially. We maintain growth may remain at 7% for the year, albeit with the downside risk. Even as recovery in domestic economic activity is yet to be broad-based, global drags in the form of still-elevated prices, shrinking corporate profitability, demand-curbing monetary policies and diminishing global growth prospects weigh on growth outlook,” Arora said.
Uneven monsoon to dampen rural demand; Healthy Capex in FY23 bodes well for investments
With the global headwinds, India’s external sector would face a challenging time going forward, and it will be critical for domestic consumption and Investment to gather momentum, according to Rajani Sinha, Chief Economist, Care Ratings. She said, “While lowering of inflation will provide support to overall consumption spending, uneven monsoon will play a spoiler for rural demand. On the investment front, there are positive signals appearing with the rise in capacity utilisation to 75 level”. Additionally, govt’s healthy capital expenditure in FY23 so far also bodes well for the investment scenario,” she said.
Russia-Ukraine tensions, oil prices, slowdown in West to guide growth
Nish Bhatt, Millwood Kane International said that while India’s Q1 GDP data at 13.5%, a double-digit growth may optically look high, it is lower than most estimates as the quarter was not affected at all by the pandemic. “While it is encouraging to see growth in the agriculture output, the manufacturing segment was a big drag. The growth in the construction segment indicates higher demand for cement, steel, and other allied segments,” he added. A good monsoon year is likely to provide a boost to Q2 growth. Oil prices, geopolitical tensions between Russia-Ukraine, and a slowdown in the West will guide global growth going forward.
RBI to retain focus on inflation, may deliver 50 bps rate hike in next two MPC meets
Rahul Bajoria, MD & Chief India Economist, Barclays, believes that the resilient growth backdrop will result in the Reserve Bank of India (RBI) retaining its focus on containing inflation, The central bank remains on a path of front-loaded hikes, as was evident from the August MPC minutes. “We expect the RBI to deliver another 50bp of rate hikes over two meetings in September and December, taking the Repo rate to 5.90%, which should also be the time when real rates reach levels desired by the MPC. However, if global commodity prices continue to decline, we note the risk that the bank does not raise rates in December,” Bajoria said.
Meanwhile Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products Kotak Mahindra Asset Management Company believes that the Q1FY23 GDP robust growth data was on expected lines, and may not lead to much reaction in Indian bond yields as the key focus for debt markets would hinge on direction of US treasuries and dollar index movement.
