Many Headwinds To More Than Halve H2 Growth To 4-4.5%: India Ratings

The many rising headwinds, both domestic as well as external, will more than halve the GDP growth to 4-4.5% in the second half of FY2023, shaving off the better numbers in the first half, says a report.

In the first half of the current fiscal, the economy has grown at 9.7%—6.3% in the September quarter and 13.5% in the previous three months, and forecasts for the full year vary from a low of 6.6% to 7%.

According to India Ratings, the economic recovery in H1FY23 was resilient and encouraging, but challenges such as high inflation and weak demand (both domestic as well as external) are expected to pull down the economic growth to 4-4.5% in H2FY23 from 9.7% in the first half of the fiscal.

The agency however did not offer a full-year forecast. September quarter data indicate that despite the geopolitical uncertainty and fear of a global slowdown, the domestic economy has shown resilience. In fact, the Q2 growth print remains next only to Saudi Arabia's 8.6% among the major economies, says the agency.

Notwithstanding this, the economy still has a lot of ground to cover which was lost due to the pandemic as the CAGR during Q1FY20-Q2FY23 works out to be a paltry 2.5%, significantly lower than the CAGR of 5.3% during Q2FY17-Q2FY20.

Even at the disaggregate level, key employment-intensive sectors like manufacturing and trade, hotels, transport and communication clipped at a CAGR of just 2% and 0.7%, respectively during this period while the CAGR for Q2FY17-Q2FY20 were 3.4% and 8.1%, respectively.

The report also points to the muted wage growth at the lower end of the income pyramid, resulting in a skewed recovery of consumption demand. A broad-based recovery in consumption demand is imperative for sustained growth.

The road ahead will not be without hiccups as synchronous global monetary tightening has increased financial fragility and downside risks to global growth which would impact the Indian economy as well, notes the report.

The report also notes the nascent industrial output growth, which fell to an eight-quarter low of 1.5% in Q2FY23 from 9.5 per cent on-year.

A closer look at the factory output data suggests that eight sectors representing roughly 25% of the manufacturing sector contracted in Q2, keeping manufacturing sector growth at a tepid 1.4% in Q2. The sectors which were contracted are apparel, textiles, leather and related products, pharmaceuticals, medicinal & related products and electrical equipment.

The agency believes many industrial sectors will face headwinds on the export front due to the growth slowdown in key trading partners.

Noting that services the sector still shows mixed signals, it says growth in ports cargo and railways freights slowed to a seven-month low of 3.7% and a 27-month low at 1.4%, respectively. Air cargo traffic declined 15.1% in the same period, making it the biggest contraction since September 2020. This has both air and rail passenger traffic trailing the pre-pandemic levels.

However, the financial sector is seeing a strong bounce back with non-food credit growing at a robust 17.1% at a 34-month high, while non-food credit growth is fairly broad-based.

After a successful run for many quarters merchandise exports contracted by a massive 16.7% to $29.8 billion in October—the first contraction in 19 months. Merchandise imports also lost steam, clipping at just 5.7% in October and all the available indicators show that exports will continue to face more headwinds.

Another big headwind is the sticky inflation, both at the consumer and wholesale levels. Retail and wholesale inflation came in at 6.8% and 8.4%, respectively, in October. And the agency expects retail inflation to soften to around 6.6% in November and ease further thereafter provided the Ukraine war does not worsen.