Why are rating agencies cutting India’s GDP forecast despite a 13.5% rise in the first quarter of FY23?


As India’s gross domestic product (GDP) grew by 13.5% in the first quarter of the current FY23, rating agencies and other financial institutions have cut their growth prospects for the country during of this exercise.

“Real GDP or Gross Domestic Product (GDP) at constant prices (2011-12) in the first quarter of 2022-23 is expected to reach a level of Rs 36.85 lakh crore, compared to Rs 32.46 lakh crore in the first quarter of 2021- 22, showing a growth of 13.5% compared to 20.1% in the first quarter of 2021-22,” read a statement from the Ministry of Statistics and Program Implementation.

That said, real GDP in the first quarter of FY23 grew only 3.8% from the same quarter of FY20. Despite a weak base in the same period a year ago due of economic activities impacted by the Delta wave of Covid-19, the economy managed to grow below expectations in the first quarter. This is perhaps one of the main reasons why India’s growth estimates are down today.

The full picture

India’s GDP recorded 20.1% year-on-year growth last year after contracting 24.4% in FY21 due to a nationwide lockdown imposed to curb the spread of Covid-19. In the June quarter of FY23, sequentially, GDP contracted 9.6% from the March quarter of FY22.

At basic prices, gross value added rose 12.7% in the April-June quarter, but nominal GDP rose 26.7%, highlighting high inflationary pressures.

Private final consumption expenditure, or private consumption, recorded robust growth of 25.9% as pent-up demand boosted consumer spending. However, government spending was only up 1.3%, meaning the states and the Center were conservative in their spending during the quarter.

Gross fixed capital formation, the closest estimate of investment demand in an economy, grew 20.1%, but compared to the pre-pandemic period of FY20, it n only recorded growth of 6.7%.

Manufacturing was the biggest disappointment, rising only 4.8%. Although trade, hotels and transport services recorded a robust growth of 25.7%, the sector, which has the highest contribution to GDP, remained 15.5% below the pre-war level. pandemic in the same quarter of FY20. The labor-intensive construction sector grew by 16.8%, but barely managed to reach the pre-pandemic level, with growth of 1.2%.

Growth questioned

Just after the government recently released its GDP data for the April-June quarter, several banks, financial institutions and rating agencies rushed to revise India’s GDP growth estimates downwards for FY23. Among those who lowered their outlook are Moody’s, Citigroup, State Bank of India and Goldman Sachs.

Compared to the previous growth projection of 8%, Citigroup has revised its FY23 growth projection for India to 6.7%. Citi economists Baqar M Zaidi and Samiran Chakraborty wrote in a report that the RBI’s aim for calibrated monetary policy measures would face challenges as the upside risk to inflation and the risk to decline for growth were emerging. According to Deutsche Bank, the slow growth could cause the RBI to ease the quantum of rate hikes.

Goldman Sachs revised its GDP growth projection to 7% from 7.2% previously. He noted that while key drivers of domestic demand were in line with market expectations, “a sharp drop in inventories and statistical discrepancies came as a surprise.”

Moody’s changed its estimate to 7.7% from 8% previously. He said the downgrade was due to expected slower economic momentum in the coming quarters due to an uneven monsoon, rising interest rates and slowing global growth.

However, Moody’s also said it expects the RBI to continue tight monetary policy in 2023 to curb domestic inflation pressures. “Our forecast that India’s real GDP growth will slow from 8.3% in 2021 to 7.7% in 2022 and slow further to 5.2% in 2023 assumes that rising interest rates, uneven distribution of the monsoon and slowing global growth will dampen the economy’s momentum on a sequential basis,” Moody’s said.

The SBI revised its GDP growth outlook for FY23 to 6.8% from 7.5%. According to a report from India’s largest bank, weaker growth in the manufacturing sector underscored pandemic-induced uncertainties that impacted margins and slowing profit growth in the first quarter.

“Although GDP grew in double digits, it remained below market expectations. The main culprit is growth in the manufacturing sector, which grew by only 4.8% in the first quarter,” Soumya Kanti Ghosh, chief economic adviser at SBI Group, said in the report, explaining why agencies are nervous. to India’s growth.


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