Headwinds To India's GDP Growth Getting Stronger, Say Economists
A normalising base, tighter financial conditions and rising external headwinds mean slower growth in the quarters ahead.
Although economic activity has held up so far, a normalising base, tighter financial conditions, and rising external headwinds mean slower growth in the quarters ahead, cautioned economists.
GDP grew 6.3% annually in the second quarter of FY23, compared with 13.5% in Q1, while gross value added, stripping out the impact of subsidies and indirect taxes, grew 5.6% year-on-year in Q2, compared with 12.7% in Q1.
Growth Rate Cycle Has Likely Peaked: Nomura
GDP growth rose sequentially by 1.4% quarter-on-quarter on a seasonally adjusted basis from 0.2% in the previous quarter, implying an annualised growth of about 5.7%, according to estimates by Nomura.
The underlying details are a mixed bag, with weak private consumption and the industrial sector offset by higher investment and services, according to Nomura.
On the demand side, private consumption momentum eased sequentially by 0.5% quarter-on-quarter, seasonally adjusted, in line with the plateauing in high-frequency consumption indicators. This was due to elevated inflation and the K-shaped recovery weighing on rural consumption demand.
Fixed investment momentum has been robust, rising by 5% quarter-on-quarter, seasonally adjusted, reflecting the lagged effects of easy financial conditions and the government’s capex push.
The momentum of government consumption continued to contract, although it improved from the previous quarter. The drag from net exports on GDP growth eased to a still elevated -4.3 percentage points in the second quarter of the current fiscal from -6.2 percentage points in Q1, reflecting robust export growth amid sequentially slowing imports.
Overall, real GDP stood 8.4 percentage points above its pre-pandemic level in Q2, compared to 7 percentage points in Q1.
We believe India’s growth rate cycle has peaked and a broad-based slowdown is underway. Although lower inflation should help support private consumption in the coming months, the lagged effects of tighter financial conditions and weak global demand will weigh on both investment and exports, while the post-pandemic catchup in services is largely complete.Sonal Varma & Aurodeep Nandi, India Economists, Nomura
Nomura expects GDP growth to slow from 7% year-on-year in FY23 to 5.2% in FY24.
Curbs To Domestic Demand
Improving contact-intensive services amid stable urban consumption demand could continue at a slower pace for some more time, said Madhavi Arora, lead economist at Emkay Global Financial Services.
"However, our channel checks depict mixed demand trends during the recent festive season," she cautioned.
Employment growth in the formal sector appears to be reducing. Additionally, subdued real rural wage growth may further impact rural consumption, according to Arora.
Capex indicators are healthy, with an added improvement in capacity utilisation and signs of new investment gradually coming in with capital goods production registering an uptick.
Yet, the momentum of the recovery is still below full strength, warranting policy support and a push of government capex.
Global price disruptions point to a confluence of China's slowdown and demand-curbing global policy actions; these pose downside risks to domestic economic activity. This, in conjunction with higher global uncertainty, tightening global financial conditions, lower corporate profitability, and a tighter policy reaction function at the RBI, will further curb domestic demand.Madhavi Arora, lead economist, Emkay Global Financial Services
"We retain GDP growth of 7% for FY23 while acknowledging rising downside risks to our forecast," said Madhavi.
Resilience In Growth; Downside Risks Rising
High-frequency indicators in the third quarter of the current fiscal have held up so far, indicating resilience in growth, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.
With favourable base effects disappearing, growth is expected to normalise over the coming quarters, he said. Additionally, lower crude oil prices should begin contributing positively to terms of trade.
However, headwinds to the Indian economy are steadily increasing due to the lag effect of monetary policy tightening and the looming global slowdown or recession affecting domestic demand.
Exports are already reflecting a slowdown, with October’s print falling to the first sub-$30 billion reading since February 2021. Additionally, private sector capex is likely to be delayed given the uncertain global and domestic demand conditions.
"Factoring in the latest trends, we maintain FY23 and FY24 real GDP growth estimates at 6.8% and 6%, respectively, with downside risks to our estimates," Rakshit said.