Moody’s upgrades 2022 India GDP forecast to 9.5%

Ratings agency Moody’s has revised its economic growth projections for India during the calendar year 2022 to 9.5% from 7% back in November 2021. The upgrade in India’s GDP growth prospects are underpinned by strong recovery momentum and focus on capital expenditure in the latest Union Budget, the agency said in its latest update of global macroeconmic outlook.

In the February update of Global Macro Outlook 2022-23, Moody’s retained its projection that the Indian economy will grow at 5.5% during the calendar year 2023.

“We have raised our 2022 calendar year growth forecasts for India to 9.5% from 7%, and maintained our forecast for 5.5% growth in 2023. This translates into 8.4% and 6.5% in fiscal years 2022-23 and 2023-24, respectively. The speed of the recovery from the first lockdown-led contraction in Q2 2020, and subsequently in Q2 2021 during the Delta wave was stronger than expected, and the economy is estimated to have surpassed the pre-Covid level of GDP by more than 5% in the last quarter of 2021,” Moody’s said in its forward-looking report.

Commenting on underlying factors that are expected to have an impact on the Indian economy, the agency says, “Sales tax collection, retail activity and PMIs suggest solid momentum. However, high oil prices and supply distortions remain a drag on growth.”

Crude oil prices seem set for upward movement on the back of improving demand and supply concerns fuelled by geopolitical tensions. Russia’s invasion of Ukraine is expected to result in tight sanctions, which will lead to a supply crunch as the former accounts for 11% of the global crude oil exports. Even today, on the first day of Russia’s military operation into Ukraine, crude prices skyrocketed to almost $105 per barrel, and could even reach $110 per barrel, according to industry watchers. A rise in crude prices will likely heighten inflationary pressures and destabilise current account deficit, putting economic growth plans at risk.

Further in the report, Moody’s noted the return to normalcy should hasten as the third Covid-19 wave subsides. “As is the case in many other countries, the recovery is lagging in contact-intensive services sectors, but it should pick up as the Omicron wave subsides. With most remaining restrictions now being lifted with the improvement in the Covid-19 situation, including the reopening of schools and colleges for in-person instruction across various states, the country is on its way to normalcy.”

The agency also hoped the momentum of economic recovery from 2021 to supplement the growth prospects this year.

“Our 9.5% growth forecast for 2022 assumes relatively restrained sequential growth rates; thus, there is upside potential to the growth rate. We estimate the carry-over from a strong finish to 2021 will add 6%-7% to this year’s annual growth. The 2022 union budget prioritizes growth, with a 36% increase in allocation to capital expenditure to 2.9% of GDP for fiscal year 2022-23, which the government hopes will crowd in private investment,” it says.

Moody’s pointed out that the monetary policy remains supportive of growth with the Reserve Bank of India (RBI) retaining key policy rates at its February meeting.

“The RBI expects inflation to remain close to the upper limit of the target band due to base effects but to fall back in Q4 of the 2022 calendar year. We expect the RBI to begin tightening liquidity measures and to raise the repo rate in the second half of this year, provided that growth momentum continues to improve,” says Moody’s.

The agency noted that the G-20 economies will collectively expand 4.3% in 2022, down from 5.9% in 2021 yet still above long-term trend growth. Global growth will further slow to 3.2% in 2023 with pandemic-fuelled output losses largely recouped and labour markets in advanced economies approaching a full recovery.

Potential worsening of the pandemic, repeated supply shocks, overly tight monetary policy, fallout from China's property market downturn to other economies, and rising social discontent could dampen the outlook, Moody’s warned. The escalation of the Russia-Ukraine situation poses risks to energy market stability and raises the prospect of potentially more severe sanctions on Russia, it further noted.