India's economic growth was projected to grow by 6.8% in 2022 by the IMF, down from its earlier estimates of 7.4% in July and 8.2% in January. This follows the World Bank's downgrading of India's anticipated GDP for the current fiscal year to 6.5% earlier this month. The Reserve Bank of India estimated a real GDP of 7% last month.
As per IMF's most recent World Economic Outlook, almost a third of the global economy will contract this year or the following year, and the economies of the United States, the European Union, and China will remain stagnant.
According to the IMF, the world economy has suffered numerous setbacks, such as the war in Ukraine, which has increased the cost of food and energy, COVID-19 and its impact on economic systems, as well as escalating prices and increasing rates of interest.
Given that the global slowdown has already started to affect India's export earnings and industrial activity, the country's growth is likely to slow over the next two years. Additionally, as interest rate increases are more widely felt by consumers and contact-based services lose some of their competitive edge, domestic demand may be put under pressure.
Here are five factors that will contribute to this:
A sharp decline in activity will be difficult to avoid for advanced nations as central banks aggressively raise rates to combat inflation. Concerns over the outflow of foreign funds have arisen due to the narrowing of interest rates, which could ultimately increase the pressure on the rupee to depreciate.
Although a weakening rupee helps exports to a certain extent, the impact of sluggish demand, which is a key factor in export growth, overshadows it. Slowing exports and fluctuating foreign portfolio investment (FPI) inflows are already beginning to be felt in India because of tightening monetary policy and diminishing growth momentum in advanced economies. The growth pullback in the advanced economies has not only put pressure on exports of goods and services but also on tourism, and remittances.
Decline in exports
Since July 2022, India's exports, especially those that are not oil, have been declining. India's exports to the US decreased significantly on a year-over-year basis by 0.4% in September compared to 28.7% in June and to the EU by 2.8% from 38.9%. Export volume declines have impacted domestic industrial growth. The impact of the global slowdown on Indian exports may also deteriorate income prospects in labour-intensive manufacturing sectors like textiles and gem and jewellery.
Decrease in the consumption of consumer goods
Two-wheeler revenue continues to lag corresponding levels even though passenger vehicle revenues have already been growing by double digits since May 2022 and have surpassed pre-pandemic levels. Since March 2022, even consumer non-durables have experienced the biggest growth decline among the major IIP components. In September through October 2022, the trend for core imports was to slow down. IIP has decreased for both consumer durables and nondurables, possibly due to a decline in demand.
Unfavourable weather conditions
The weather's whims have an impact on rural income prospects. This year's unusual weather conditions had an impact on agricultural production. The wheat crop was harmed at the time of harvesting due to the heatwave that occurred from March to May. Rains that were later than expected hurt the rice crop's sowing.
Finally, several kharif crops that were about to be harvested were damaged by excessive rain in October. Although India experienced excessive rains in October of the previous year as well, their quantity and duration were noticeably greater in 2022. The frequency of extreme weather events indicates a greater problem.
Shortage in food supply
Wheat supply constraints will lead to increased cereal inflation till the rabi season. Furthermore, even after rice buffers, reduced rice kharif sowing is driving up crop prices. Because of the postponed monsoon withdrawal and seasonal demand, vegetables will experience elevated inflation until November. Retail prices for onions and tomatoes have already risen by double digits year on year in October. Geopolitical tensions continue to have an impact on international energy prices.
Despite the short-term slowdown, India is expected to remain a growth outperformer in the medium term, with Crisil forecasting 6.6% GDP growth between fiscal years 2024 and 2026, compared to 3.1% globally — as estimated by the International Monetary Fund. India is also expected to outperform peers in the emerging market, including China, Indonesia, Turkey, and Brazil.
In the medium term, relatively strong household consumption is expected to boost India's growth premium over peers. Given the government's capex push, the progress of the Production-linked Incentive (PLI) scheme, healthier corporate balance sheets, and a well-capitalised banking sector with low non-performing assets, investment prospects are upbeat. India is also likely to profit from the China-plus-one policy as the world's supply chains are altered. Over the medium term, private consumption will contribute to increasing GDP growth.
Achin Goel is the Vice President at Bonanza Portfolio Ltd