Why Are Rating Agencies Slashing India's GDP Forecast Despite A 13.5% Bump In Q1 FY23?

While India’s gross domestic product (GDP) grew 13.5 per cent in the first quarter of the ongoing FY23, rating agencies and other financial institutions have slashed their growth outlook for the country in this fiscal year. 

"Real GDP or Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q1 2022-23 is estimated to attain a level of Rs 36.85 lakh crore, as against Rs 32.46 lakh crore in Q1 2021-22, showing a growth of 13.5 per cent as compared to 20.1 per cent in Q1 2021-22," read a statement by the Ministry of Statistics & Programme Implementation. 

That said, the real GDP in the first quarter of FY23 is up by just 3.8 per cent as compared to the same quarter of FY20. Despite a low base in the same period a year ago due to economic activities impacted by the Delta wave of Covid-19, the economy managed to grow below expectations in the first quarter. That, perhaps, is one of the major reasons behind India’s growth estimates getting trimmed today.  

The Full Picture

Last year, India's GDP saw a year-on-year growth of 20.1 per cent after witnessing a contraction of 24.4 per cent in FY21 on account of a nationwide lockdown imposed to curb the spread of Covid-19.  In the June quarter of FY23, sequentially, GDP contracted 9.6 per cent as against the March quarter of FY22. 

At basic prices, the gross value added was up 12.7 per cent in the April-June quarter but nominal GDP grew by 26.7 per cent, highlighting elevated inflationary pressures.  

Private final consumption expenditure, or private consumption, recorded a robust growth of 25.9 per cent as pent-up demand spurred consumers’ spending drive. However, government spending was up only 1.3 per cent, which means that both states and the Centre have been cautious in their spending during the quarter. 

Gross fixed capital formation, the closest estimate of investment demand in an economy, saw a growth of 20.1 per cent but as compared to the pre-pandemic period of FY20, it recorded a growth of only 6.7 per cent.  

Manufacturing was the biggest disappointment as it grew only by 4.8 per cent. Though trade, hotel and transport services recorded a robust 25.7 per cent growth, the sector, which has the highest contribution to the GDP, remained 15.5 per cent below the pre-pandemic level in the same quarter in FY20. The labour-intensive construction sector recorded a growth of 16.8 per cent but just managed to scrape through pre-pandemic level, growing 1.2 per cent. 

Growth Under Question 

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

From the earlier 8 per cent growth projection, Citigroup has revised its FY23 growth projection for India to 6.7 per cent. Citi economists Baqar M Zaidi and Samiran Chakraborty wrote in a report that RBI’s aim for calibrated monetary policy measures would face challenges as upside risk to inflation and downside risk to growth emerged. According to Deutsche Bank, slow growth might result in the RBI easing the quantum of rate hikes.  

Goldman Sachs revised its GDP growth projection to 7 per cent from the 7.2 per cent set earlier. It noted that though the main drivers of domestic demand were in line with market expectations, “a large drawdown in inventories and statistical discrepancies came as a surprise.”  

Moody’s changed its estimate to 7.7 per cent from 8 per cent earlier. It said that the downgrading was on account of the dampening of economic momentum expected in the upcoming quarters because of uneven monsoon, rising interest rates, and a slowdown in global growth. 

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

SBI revised its FY23 GDP growth outlook to 6.8 per cent from 7.5 per cent. According to a report by the largest bank in India, a lower growth in manufacturing highlighted the pandemic-induced uncertainties that had an impact on margins and that profit growth had also slowed in the first quarter. 

“Although GDP grew in double digits, it still came below market expectations. The primary culprit was growth in the manufacturing sector which grew by a measly 4.8 per cent in Q1,” Soumya Kanti Ghosh, SBI group chief economic advisor, said in the report, explaining why agencies are jittery about India’s growth.