Credit rating agency Fitch Ratings on Thursday raised India's gross domestic product (GDP) forecast to 6.3% — one of the highest growth rates in the world — for the financial year 2023-24 compared with 6% projected earlier.
India's economy has been showing broad-based strength – with GDP up by 6.1% year-on-year in Q1 2023 and auto sales, PMI surveys and credit growth remaining robust in recent months, the rating agency says in its Global Economic Outlook for June 2023.
With growth expected to moderate further, and inflationary pressures easing, Fitch expects the Reserve Bank of India (RBI) to pause its rate cycle for the time being before cutting early next year – a change from its previous call of one more 25-basis-point increase to 6.75%. The RBI has kept policy rates at 6.5% since the start of the year, while headline inflation has eased from a peak of 7.8% to 4.3% in May, a figure that is already within the RBI's tolerance band.
"Growth on a non-seasonally adjusted basis in 1Q23 was higher than expected at 6.1% yoy relative to our forecast of 4.3% yoy. This means that growth for the fiscal year ending in March 2023 was 7.2%, a slowdown from the 9.1% in the previous fiscal year. The breakdown by industry showed a recovery in manufacturing, after two consecutive quarterly contractions, a boost from construction and an increase in farm output," says Fitch Ratings.
In expenditure terms, GDP growth was driven by domestic demand and a boost from net trade, the rating firm says. "Recent high-frequency data point to sustained near-term momentum as highlighted by rising PMI indices, higher car sales and increased power consumption. The economy also continues to benefit from high bank credit growth and infrastructure spending," Fitch says.
Fitch, however, cautions that India's economy will be affected to an extent by slowing global trade. "Domestically the full impact of 250 basis points of monetary tightening is still to be felt. Consumers have also experienced a drop in purchasing power as inflation increased sharply in 2022 and household balance sheets have also been weakened through the pandemic," it says.
At the same time, the government's push for increased capital expenditure, moderation in commodity prices and robust credit growth are expected to support investment, the credit rating agency says.
Fitch says slowing inflation should also start to help consumers over time and households have now turned more optimistic about future earnings and employment. However, while inflation has eased there are near-term upward risks in the second half of 2023, given the monsoon outlook and the potential impact of El Niño, it warns.
This comes two weeks after RBI's monetary policy committee retained its GDP forecast for the financial year 2023-24 at 6.5%. The MPC projected real GDP growth for 2023-24 at 6.5% with Q1 at 8%, Q2 at 6.5%, Q3 at 6%, and Q4 at 5.7%.
According to the World Bank, India will remain the fastest-growing economy in terms of both aggregate and per capita GDP of the largest emerging market and developing economies. The global financial institution retained its April forecast for India's GDP growth forecast at 6.3% for the financial year 2023-24, a 0.3 percentage point downward revision from January.