India's economy is not immune to global shocks.
Global economies hit hard by Covid-19 are now facing the double whammy of hyperinflation and a sharp rise in interest rates in an attempt to bring it down. However, high inflation and interest rates are fueling another problem, a potential recession in developed countries. Although India's economy is on a comparatively strong wicket, it is not immune to global shocks. In recent days several agencies have cut India's GDP growth forecasts for next year.
Goldman Sachs, for instance, cut India's GDP growth forecast for 2023 to 5.9 percent from 6.9 percent in 2022. And monetary tightening affects domestic demand. In the second half, growth is likely to accelerate again as global growth picks up, net exports decline and the investment cycle picks up,” said Santanu Sengupta, India economist at Goldman Sachs. The OECD (Organization for Economic Cooperation and Development) sees India's GDP growth has slowed to 6.6 percent in 2022-23 and 5.7 percent in 2023-24. Credit rating agency CRISIL expects India's GDP growth to slow this fiscal and the next. So, while GDP growth in 2022-23 is now pegged at 7 percent from the earlier estimate of 7.3 percent, in the year ending March 2024, GDP growth is expected to decelerate to 6 percent earlier than 6.5 percent.
Industrial activity in India has begun to experience tremors
India's exports (especially non-oil) have slowed since July 2022. India's exports to the US (0.4% in September vs 28.7% in June) and the European Union (EU) (2.8% vs 38.9%) declined significantly. ), the report said. Falling exports have affected the domestic industrial sector. The industrial production index for export-linked sectors is on a downward trend since July 2022.
"Industrial activity may take a hit in fiscal 2024 as aggressive rate hikes in the US and EU trickle down to consumers. However, rising domestic demand in some pockets is partially cushioning industrial activity. For example, strong government CAPEX is supported. Manufacturing growth is underpinned by higher demand for infrastructure and construction-related goods. Joshi said. The impact of the global slowdown on India's exports could also weaken earnings prospects in labor-intensive manufacturing industries such as textiles, gems, and jewelry. In this fiscal year, agriculture GDP growth was very slow at 3.0% compared to the decade average of 3.8%. Healthy soil moisture and reservoir levels will support agriculture during the Rabi season, which will offset some of the losses to Kharif crops due to erratic rains," Joshi said. The increasing number of extreme-weather events highlights a major challenge. And, while reduced demand for MGNREGA jobs is an encouraging sign for the rural economy from an employment perspective, depressed wages are a concern for rural demand.
Tight economic conditions could test the resilience of domestic demand next year
So far, the Reserve Bank of India (RBI) has raised the policy repo rate by 190 basis points (bps). While the repo rate is above the pre-pandemic level of 5.15%, it is below the peak of 6.50% reached in 2018 during the last rate hike cycle. Similarly, bank lending rates have so far remained below the five-year average before the pandemic, indicating that the impact on domestic demand and lending activity is still not negative. But that is expected to change soon as rate hikes and low liquidity seeps into the system. "As transmission increases, higher borrowing costs could take some of the steam out of the current strength in domestic demand," Crisil said.
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