The Growth Coin
On one side, the coin shows India as the world’s fastest-growing economy. Flip it, and GDP growth is clearly slowing. And that could be a worry
▶ ON DECEMBER 7, WHEN Reserve Bank of India (RBI) Governor Shaktikanta Das announced the hiking of the repo rate (the rate at which the central bank lends to other banks) by 35 basis points to 6.25 per cent, heads nodded in agreement, as the hike was on expected lines. But what mildly raised eyebrows was his announcement of a cut in the gross domestic product (GDP) growth projection for FY23 to 6.8 per cent from 7 per cent forecast in September. In fact, the 7 per cent itself was a step down from the 7.2 per cent that the central bank had held earlier (in April), and not because of continuing challenges such as external geopolitical disturbances impacting India’s exports, inflation, etc.
In fact, the GDP growth rate for Q2 of FY23, which was announced six days before the governor’s address, slowed to 6.3 per cent—from 13.5 per cent in Q1 of
FY23 and 8.4 per cent in Q2 of FY22.
But that seems not to have worried anyone because it was on expected lines. “Interestingly, the GVA (gross value added) growth figures were 70 bps short of the GDP numbers. This may be due to higher tax collections as GDP is GVA plus net taxes,” points out Sanjay Kumar, Partner, Tax and
Public Policy Leader at Deloitte
Touche Tohmatsu India. “Higher tax collections are good and bode well for the current financial year. It is another sign of a good recovery.”
What is perhaps worrying is the avalanche of GDP forecast cuts in the months preceding the RBI’s latest monetary policy announcement. It all began on September 1, when Soumya
Kanti Ghosh, the Group Chief Economic Adviser of India’s biggest bank, State
Bank of India (SBI), cut his forecast for
India’s GDP growth in FY23 by a significant 70 bps—from 7.5 per cent to 6.8 per cent. Several financial institutions followed in SBI’s footsteps and downgraded their GDP growth forecasts for India in fiscal FY23 (see chart ‘Dipping Growth’). Slowdown in the manufacturing sector, external risks and inflation were the primary reasons cited.
The one exception there was ICRA, which held on to its projection of 7.2 per cent growth in FY23. Why did ICRA maintain its position? Aditi Nayar, Chief Economist of ICRA, explains: “The MPC (Monetary Policy Committee of the RBI) had reduced its growth forecast for FY23 as the outcome for the first quarter (13.5 per cent) had trailed its projection, whereas it was quite close to our own forecast (13 per cent). While a downside is posed by weakening global growth, merchandise
exports have been revised upwards for the last quarter, and the festive season also saw robust sentiment, based on which we have maintained our FY23 growth forecast of 7.2 per cent.”
If anything, the GDP forecasts for the next fiscal, FY24, are gloomier. CRISIL expects 6 per cent GDP growth in FY24, and IMF expects 6.1 per cent. The sentiment is similar among other agencies, too. “Given the lags associated with monetary policy transmission, we have pared our GDP growth forecast for FY24. Once inflation falls within the tolerance zone, further rate hikes should be data-dependent, in our view, with the balance tipping slightly in favour of avoiding a growth sacrifice,” says Nayar of ICRA. Goldman Sachs, too, has predicted that in calendar year 2023, India’s GDP would grow at 5.9 per cent, a full 100 bps lower than 6.9 per cent in 2022.
But that is where the dim commentary starts to turn bright. In its India 2023 outlook report, Goldman Sachs said: “Growth (in FY24) will likely be a tale of two halves, with a slower first half as the reopening boost fades, and monetary tightening weighs on domestic demand. In the second half, growth is likely to re-accelerate as global growth recovers, drag from net exports diminishes and the investment cycle picks up.”
A key ingredient in net exports is the value of the rupee versus the dollar. Dharmakirti Joshi, Chief Economist of rating agency CRISIL, expects the rupee to perform better in FY24, pointing out that the currency has stabilised in recent times due to some softening in the strength of the US dollar, return of FPI flows, and decline in global crude oil prices. He expects the rupee to gradually appreciate and average 79.5 against the dollar in March 2023 compared with 76.2 in March 2022. “Next fiscal, the rupee is expected to remain rangebound and not depreciate much as our CAD (current account deficit) softens.” That would translate to less pressure from imported inflation, which would support lower domestic inflation. “This in turn would mean lesser headwinds for consumption and investment demand next fiscal,” says Joshi.
Goldman Sachs had a dimmer view on the rupee, though, indicating that the Indian currency would likely depreciate to 84 per dollar in three months, and gradually stabilise to 82 over a period of 12 months. At the same time, it expects that “growth capital may continue to chase India, as global firms are looking to diversify sources of supply and India presents an attractive opportunity over the long term”.
How to keep growth going in FY24? CRISIL’s Joshi expects the government to keep its capex run going to stimulate growth. “With consumption demand still nascent and broad-based private sector investments facing headwinds due to an uncertain demand environment, the government is expected to maintain its focus on infrastructure-led capital expenditure next fiscal as well,” he says.
But while there are certain positives for the next fiscal, one can’t afford to be complacent. “Going forward, various estimates indicate that the GDP growth is likely to be around 6.8 per cent (in FY23). That would mean that India is by far the fastest growing economy, and that too the fifth-largest economy in the world,” says Kumar of Deloitte. “It will, however, be important to watch out for risks stemming from the global slowdown and ongoing geopolitical issues that can cause larger disruptions in the growth momentum.”
Being on guard is probably the right stance in this situation. After all, whether the appellation of the “fastest-growing economy in the world” will be enough to soothe nerves when the growth engine agonisingly slows, is the moot question.
Footnote: On December 7, the day Governor Das cut the FY23 GDP growth forecast by 20 bps, the World Bank actually raised its GDP forecast for India to 6.9 per cent after it had cut it down to 6.5 per cent from 7.5 per cent exactly two months ago. Will the World Bank’s announcement set off another trend—of upward revisions this time—by financial institutions?