Rating agencies in their recent revision of India’s growth projection for 2023-24 do not seem to share the similar level of optimism with the Reserve Bank of India.
S&P Global Ratings recently retained India’s GDP estimate for 2023-24 at 6 per cent, lower than RBI’s current projection of 6.5 per cent.
Notably, what makes the difference in their estimates is the agency’s factoring in of the delayed effect of the rate hike cycle that spanned from May 2022 to February 2023 and El Nino further affecting crop production in India.
Cautious Rating Agencies
“In the current fiscal we project growth to slow to 6.0 per cent from 7.2 last fiscal as global slowdown will hit exports, lagged impact of domestic rate hikes will play out and erratic weather and El Nino can curb prospects for agricultural growth,” said Dharmakirti Joshi, Chief Economist, CRISIL Ltd.
RBI in its rate hike cycle raised the benchmark interest rate or the repo rate by 250 basis-points cumulatively to tame inflationary pressures. Experts are of view that typically such long rate hike cycles have a delayed impact on the country’s economy.
Similarly taking deficient rainfall into account, Fitch group’s India Ratings and Research has also exercised caution while revising its estimate to only till 6.2 per cent from 5.9 per cent earlier this month.
India Ratings is of opinion that tighter financial conditions have led to a rise in the cost of capital with tepid manufacturing growth. “All these risks continue to weigh and restrict India’s GDP growth to 6.2 per cent in FY24,” said Sunil Kumar Sinha, Principal Economist at India Ratings.
However, the rating agency which has pegged a similar estimate with S&P Global is Acuite Ratings and Research.
Suman Chowdhury, Chief Economist and Head of Research at Acuite Ratings and Research said they expect growth outcomes to moderate due to unfavourable statistical base along with several factors that play a role in pace of economic growth.
RBI on the other hand, in its August policy review kept its projection on India’s GDP growth for 2023-24 unchanged for the second consecutive time at 6.5 per cent due to sustained strong domestic demand conditions.
The central bank in its paper expressed faith in India’s progress on both investment and consumption front with citing weak external demand and geopolitical tensions as risks to the outlook.
“External factors are likely to impinge on the growth prospects of most major advanced and emerging economies. India is, however, expected to withstand these external headwinds far better than many other countries,” said RBI Governor Shaktikanta Das in his August monetary policy statement.
For quarterly projections, RBI estimates 6.5 per cent growth in Jul-Sep, 6 per cent in Oct-Dec, and 5.7 per cent in Jan-Mar.
Indian economy in June quarter grew at 7.8 per cent due to higher expenditure and strong services growth. The figure was 20 basis-points lower than RBI’s estimate for the quarter.
Furthermore, Das in his statement addressed the uneven distribution of monsoon in the country and raised the inflation projection for 2023-24 to 5.4 per cent from 5.1 per cent with revised quarterly estimates.
Considering RBI’s inflation estimate of 6.2 per cent for the September quarter lagging behind the actual figures for the quarter as of now, some revisions are expected from the central bank at the upcoming October policy review.
However, what will be crucial to see whether the regulator touches any of its GDP estimate, and if yes, then to what extent.
Where external factors such as high inflation, volatile financial markets and extreme weather conditions remain a concern for all, RBI currently seems to have a more optimistic view than these rating agencies on India’s internal potential.
Nonetheless, both the rating agencies and RBI expect India’s growth to slow down sequentially in the remaining three quarters of 2023-24.