Global rating agency S&P has trimmed its India growth forecast by 30 basis points to 7% for the current fiscal from its September projection, thanks to growing external headwinds and the impact of the interest rate tightening by key central banks. However, it has acknowledged that India, being a domestic demand-led economy, will be less impacted by the current global turmoil than many others in the Asia-Pacific region.
The agency’s downward revision comes just days before the government is set to release the growth estimate for the second quarter on November 30. Analysts expect real growth to have slowed down to 6.3-6.5% in the September quarter. It had retained its forecast for India in September (at 7.3%) even after the government had announced weaker-than-expected 13.5% growth in GDP in the June quarter.
S&P has also revised down its India growth forecast now by 50 basis points for FY24 to 6%.
However, it expects the country’s growth to bounce back to 6.9% in each of the next two years.
In its latest report titled Global Slowdown Will Hit, Not Halt, Asia-Pacific Growth, S&P has also pencilled in another 35-basis point hike in the benchmark lending rate by the Reserve Bank of India (RBI) in the rest of this fiscal to 6.25%. It expects the average repo rate to drop to 5.5% next fiscal and to 5% in each of the two years after that.
Despite the downward revision in economic growth, S&P’s India projections for FY23 are still brighter than those of multilateral bodies, such as the International Monetary Fund (6.8%) and the World Bank (6.5%). The forecasts of most others range from 6.5% to 7.3%. Only the United Nations Conference on Trade and Development has predicted 5.7% growth for India but that is for the calendar year 2022.
Interestingly, S&P has now revised up its Covid-hit China growth projection for 2022 by 50 basis points to 3.2%, and by 10 basis points for 2023 to 4.8%.
The rating agency has raised its growth projections for the Asia-Pacific region as a whole by 30 basis points and 20 basis points, respectively, for 2022 and 2023. It now expects the region’s growth to hit 4.1% in 2022 and 4.3% in 2023.
“The global slowdown will have less impact on domestic demand-led economies such as India, Indonesia and the Philippines. India’s output will expand 7% in the fiscal year 2022-2023 (ending in March 2023)…. Indonesia and the Philippines should both grow at least 5% in 2023,” S&P said.
“In some countries the domestic demand recovery from Covid has further to go. This should support growth next year in India, Indonesia, Malaysia, the Philippines, and Thailand,” it added.
Higher interest rates will have a pronounced hit on growth in parts of the region, it said. This is either because policy rates climb strongly or the effect of the increases is profound. The RBI, for instance, was forced to raise the repo rate by 190 basis points since May to curb elevated inflationary pressure in the wake of the Ukraine war.
S&P expects India’s retail inflation to rise to 6.8% in the current fiscal from 5.5% a year before. However, price pressure at the retail level will ease to 5% in FY24 and further to 4.5% in each of the two years after that, the agency said.
S&P flagged declining foreign reserves in emerging Asian markets, even after adjusting for valuation changes. “In India, the decrease in foreign reserves of $73 billion through August was far and above losses attributable to valuation changes (of $30 billion). This implies that the central bank has made sizeable interventions to support the Indian rupee,” it said.
Meanwhile, soaring energy bills are pushing up current-account deficit for net energy importers, especially if strong domestic demand boosts import volumes. In the first nine months of 2022, the trade balance in India contracted 3.6% of GDP from a year before. However, it’s still better than that of the Philippines, which shrank about 6% of its GDP from a year ago. In Thailand, the drop was 5%; in South Korea 4%. This will likely drive up the current account balance of India into a sizable deficit, from a surplus in 2021, the agency said.