Economists predict moderation in the growth momentum for the October-December quarter due to weak demand amid aggressive rate hikes by the Reserve Bank of India (RBI).
The RBI has been on an aggressive rate-hiking journey since May 2022. It has cumulatively increased the repo rate, the key lending rate to the banks, by 250 basis points in order to tame inflation.
With inflation levels still high and out of the RBI’s tolerance band of 2-6 per cent, more such rate hikes are anticipated.
Here’s what experts say
According to a Reuters poll of economists, India’s economic growth likely slowed further in the third quarter and is set to lose more momentum as a series of interest rate hikes weigh on business activity.
Rahul Bajoria, an economist with Barclays India, said the economy would have grown at a tad lower at 5 per cent in FY23 Q3.
“For FY24, we continue to expect a soft landing as tighter monetary conditions and still-elevated inflation take a toll. We continue to see growth moderating to 6 per cent and forecast steady GDP growth of 6.5 per cent in FY25,” Bajoria told PTI.
A monthly survey by the government has shown that India’s economy was expected to slow further to 4.4 per cent in the current quarter, and across 2023-24 would average 6.0 per cent.
Economists at the State Bank of India have projected a GDP growth of 4.6 per cent for the December quarter, citing that as many as 30 high frequency indicators are not as robust as they were in the previous quarters. However, the projection is higher than the RBI’s forecast of 4.4 per cent for the Q3 FY23.
Why is the moderation expected?
Various factors are likely to moderate the Q3 GDP growth.
The moderation in numbers is being attributed to normalization of base under the base effect. “There are base effects that are normalizing and pulling down the annual numbers. The support from agriculture might be lower and also manufacturing could be a drag,” said Sakshi Gupta, the principal economist at HDFC Bank.
The base refers to the comparable figure of the corresponding period of the preceding fiscal.
The performance of 12 of the 14 high-frequency indicators of the services sector is likely to have worsened in Q3 over Q2, on a normalising base, even as some contact-intensive sectors performed slightly better than the pre-pandemic levels in Q3.
Another significant reason could be a slowdown in exports and consumer demand. The dent in consumer demand can be linked with the bullish rate hikes by the RBI to bring down inflation in the past few months. Meanwhile, slowdown in external demand could be a consequence of the rate hikes by major central banks around the world.
“Inflation is continuing to remain very high and interest rates are increasing. Pent-up demand has also started moderating,” said Gupta of HDFC Bank.
“We expect growth for the domestic economy to hold up, but a greater-than-anticipated spillover impact from weak global conditions…may have more pronounced implications for domestic growth in the near term,” noted Upasana Chachra, the chief India economist at Morgan Stanley.
“Economic activity in Q3 remained distinctly uneven, amid the upsides offered by robust demand for contact-intensive services and upbeat festive season sentiment. Trends in government spending were disparate, with a healthy revenue spending by the Centre amid a base effect-led contraction in capital spending,” she added.
The previous numbers
The economy had expanded 13.5 per cent in April-June (Q1 FY23), largely due to pandemic-related statistical distortions, before moderating to 6.3 per cent in July-September (Q2).
Earlier, the National Statistical Office, in its first advance estimates, had pegged the GDP growth at 7 per cent in the current financial year. With this revision in growth estimate, India is set to lose the tag of the fastest growing economy. The government had pegged India’s growth at 8.7 per cent in FY22 that ended March 31, 2022.
In the beginning of FY23, the RBI had cut the GDP growth estimate from 7.8 per cent to 7.2 per cent, and further lowered it to 7 per cent in September 2022.
The 7 per cent forecast was lowered to 6.8 per cent by the RBI last month due to continued geopolitical tensions and tightening of global financial conditions.
The RBI had projected the real GDP growth for 2022-23 at 6.8 per cent, and for the third quarter at 4.4 per cent. It had pared the growth projection for 2022-23 for the third time in December 2022.
Tomorrow, the government is also likely to release the second advance estimates of national income for the year 2022-23, alongwith first revised, second revised and third revised estimates of national accounts for the years 2021-22, 2020-21 and 2019-20.