Why are global rating agencies downgrading India’s GDP growth forecast?


India’s inflation-ridden economy received another jolt when financial services firm Nomura recently lowered its 2023 gross domestic product (GDP) growth projection for the country to 4.7% from 5.4 %.

“While near-term growth momentum appears to be robust, we are seeing increasing headwinds to medium-term growth due to rising inflation, monetary policy tightening, dormant investment growth and, most importantly, slowing global growth.As a result, we forecast GDP growth of 7.2% YoY (YOY) in 2022, but we have lowered our GDP growth projection for 2023 from 5.4% to 4.7%,” he said in a research note.

Nomura also said that despite the reduction in fuel taxes, there were widespread inflationary pressures in most major categories. At 7% year-on-year, consumer price index (CPI) inflation in June was unchanged from May, with food and beverage price inflation moderating, but inflation in the fuel and core CPI rose slightly, with the latter rising to 6% year-on-year from 5.9% in May.

Nomura, however, is not the first global agency to lower India’s projection this year, which is concerning.

Downward spiral

In its April monetary policy, India’s own central bank, the Reserve Bank of India, revised the country’s growth projection for the current fiscal year (FY23) down to 7.2% from from its previous estimate of 7.8%.

Globally, in June, the World Bank lowered India’s economic growth forecast for the current fiscal year to 7.5% from 8%. Interestingly, this was his second revision. In April, he had cut the forecast from 8.7% to 8%.

“In India, growth is expected to decline to 7.5% in FY 2022-23 as headwinds from rising inflation, supply chain disruptions and geopolitical tensions offset the buoyancy of the economy. the recovery of services consumption after the pandemic,” the World Bank said. said in its June 2022 Global Economic Outlook Report.

He further said that growth will be supported by fixed investments undertaken by the private sector and by the government, which has introduced incentives and reforms to improve the business climate. “Growth is expected to slow further to 7.1% in 2023/24 to return to its longer-term potential,” he added.

Like Nomura and the World Bank, agencies and organizations such as Moody’s Investor Service, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), Fitch Ratings and S&P Global Ratings have all reviewed lower their GDP growth forecast for India.

While Moody’s cut it to 8.8% for calendar year 2022 (CY22) from its March estimate of 9.1%, the IMF forecast India to grow 8.2% in 2022 -23, a sharp downward revision from its previous estimate. projection of 9 percent.

The OECD revised India’s economic growth projection for FY23 to 6.9% from 8.1% previously forecast, Fitch cut it to 8.5% from 10.3% and S&P Global Ratings reduced it to 7.3% from 7.8% previously.

Why is India downgraded?

To begin with, the Covid-19 outbreak and subsequent lockdowns and restrictions have severely affected economic activity in India.

As it recovered from the economic fallout to normal, the Russian-Ukrainian war dealt a severe blow to global supply chains. The war has sent the prices of everything from essential foodstuffs to fuel skyrocketing. Soaring global inflation has forced most central banks to raise lending rates in an effort to control inflation.

Indian inflation, too, has become chronic. At 7.01%, CPI inflation in June remained above the RBI’s tolerance range of 2-6% for the sixth consecutive month. To rein in inflation, the RBI opted to hike the interest rate by 90 basis points to 4.9% in two policy meetings. It also revised its inflation forecast for FY23, ending March 2023, to 6.7% from 5.7%.

Experts say food prices, which account for nearly half of the inflation basket, are likely to remain elevated due to supply chain issues and rising crude oil prices amid geopolitical tensions. Inflation concerns in India appear to be a major culprit in the downward revision of Indian GDP forecasts by rating agencies.

As the Indian economy is gradually gaining momentum in demand and consumption, the overall rising price level, especially for input costs, has proven to be the biggest challenge to the recovery. ongoing in the country.


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