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India’s GDP to grow at 7.5% in FY23 despite developed-economy recession; inflation to stay above 6% till Nov

Analysts have lowered their real GDP growth forecast for FY23 to 7.5%. As oil prices moderate, the fiscal and current account deficits are expected to moderate sharply in H2FY23

India’s GDP to grow at 7.5% in FY23 despite developed-economy recession; inflation to stay above 6% till Nov
RBI to raise its policy rate by another 50bp at its policy meeting at the end of this month, and a further 25 bps on 7th December to 6.15%

India’s export outlook looks weak going forward amid global headwinds. Since exports were the key peg for strong real GDP growth in the first half of the current financial year, when domestic demand was in the early stages of its climb back to pre-covid levels, analysts at ICICI Securities have lowered their real GDP growth forecast for FY23 to 7.5%. As oil prices moderate, the fiscal and current account deficits are expected to moderate sharply in H2FY23. “Private investment should continue to accelerate in FY24, enabling real GDP growth of 8.3% despite the slowdown in export growth amid the US-led developed-economies’ recession in FY24,” analysts said. 

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Export duties, windfall tax hamper exports, mining output; will rein in real GDP growth in Q2FY23

Amid global headwinds such as high fuel and food prices, central government has taken some unexpected supply-side measures to fight inflation, including export duties on petroleum products, on iron and steel products, and a windfall tax on crude oil, and some refinery products. Export growth is being held back by the export duties on iron and steel, and on petroleum products, said ICICI Securities. According to the brokerage firm, export duties, although imposed by many countries amid this year’s unusual circumstances, are a retrograde step, they hurt the long-term credibility of local exporters, and can “cause lasting damage in the highly-competitive export markets, in which India had been gaining ground in CY21 and H1CY22”.

Additionally, these export duties and windfall taxes also cause mining output to decline, and industrial production to decelerate sharply. Industrial production decelerated drastically in July, growing just 2.4% on-year, dragging down the Apr-Jul growth rate to 10% on-year. According to analysts, the windfall tax on crude oil caused the output of crude to decline 3.8% on-year in July, while natural gas output declined 0.5% on-year. The export levy is likely to have impacted iron-ore production. “While the export duties on iron & steel and petroleum products are seen as temporary, they are clearly having an impact on industrial growth, and will consequently rein in real GDP growth in Q2FY23,” they said.

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Repo rate to peak at 6.15% at December RBI MPC meeting

According to RBI’s assessment, India’s inflation peaked at 7.79% in the month of April. Since then the inflation has cooled to 7% in August. However, it still remains above RBI’s tolerance level of 6%. Since the RBI targets headline CPI inflation, rather than core inflation, the moderation in the latter to below 6% on-year provides no relief. Food inflation remains a challenge, hence analysts at ICICI Securities expect the RBI to raise its policy rate by another 50bp at its policy meeting at the end of this month, and a further 25 bps on 7th December to 6.15%. By that point, the strong kharif harvest is expected to moderate food prices. “That, and the cumulative impact of this year’s monetary tightening, should help bring headline CPI inflation back below 6% on-year in Nov’22 and beyond,” they added.

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