In its latest economic outlook on Thursday, global ratings agency Moody’s has revised its growth projections for India during the calendar year 2022 downwards to 8.8%. This is the second reduction in the country’s growth forecast by the agency this year; it had slashed its February growth projection of 9.5% to 9.1% in March.

“We have lowered our calendar-year 2022 growth forecast for India to 8.8% from our March forecast of 9.1%, while maintaining our 2023 growth forecasts at 5.4%,” the agency says in its May update for Global Macro Outlook 2022-23 released today.

According to Moody’s, high-frequency data — including GST collection, e-way bill generation, passenger vehicle retail sales, manufacturing and services PMI, core sectors’ output, and credit to different sectors — indicates that the momentum from the December quarter carried through into the first four months of 2022 because of strong reopening momentum.

“Strong credit growth, a large increase in investment intentions announced by the corporate sector, and a high budget allocation to capital spending by the government indicate that the investment cycle is strengthening,” the agency notes.

“However, the rise in crude oil, food and fertiliser prices will weigh on household finances and spending in the months ahead,” it further adds.

In the report, Moody’s cautioned that growing inflation and rate hikes to control it will impede India’s demand recovery, adding that there remains a silver lining.

“Rate increases to prevent energy and food inflation from becoming more generalised will slow the demand recovery's momentum. But unless global crude oil and food prices rise further, the economy seems strong enough to maintain solid growth momentum,” the agency states.

Moody’s foresees most G-20 economies to navigate the rest of 2022 and 2023, while maintaining favourable growth momentum, albeit under the shade of multiple risks that could undermine this optimism.

Escalation of Russia’s invasion of Ukraine, coupled with subsequent broader oil and gas sanctions would send fuel and food prices skyrocketing around the globe, putting essential commodities out of reach of households around the world. Recession would grip Europe, while importers of energy and food would see economic activity plummet, the agency states.

Further, China’s zero-Covid policy would continue to impact factories and ports performance, causing extended supply-chain disruptions. Meanwhile, fallout from China's property market downturn and lockdowns would affect countries and companies that sell products in the country. Moderation in commodity prices stemming from muted demand from the country would partly offset the commodity price shock though.

Monetary policy tightening across the globe might turn into a catalyst for recession as the effects of a simultaneous increase in policy rates and shrinking central bank balance sheets could be less benign than central banks expect. Adjusting monetary policy just enough to slow demand and bring inflation down will be difficult, and prone to policy mistakes, Moody’s says.

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