Is India’s status as the fastest-growing economy in peril?

India will release its GDP data for the first quarter of the current financial year on Thursday

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Reuters file photo
Reuters file photo

Issac John

Published: Tue 30 Aug 2022, 6:21 PM

India is unlikely to sustain the double-digit economic growth recorded in the quarter ended on June 30 as economists expect the world’s fastest-growing major economy to drastically slow its pace to more than halve this quarter and slow further toward the end of the year as interest rates rise.

The $3.3 trillion economy, which is Asia’s third largest, is predicted to record a 6.2 per cent year-on-year growth this quarter from a median forecast of 15.2 per cent in Q2, supported mainly by statistical comparisons with a year ago rather than new momentum, before decelerating further to 4.5 per cent in October-December, according to panelists polled in a survey by Reuters.

Amid global economic uncertainties, India will release its GDP data for the first quarter of the current financial year on Thursday. While the Reserve Bank of India has estimated a 16.2 per cent economic growth for the April to June quarter of the current financial year, the State Bank of India projected the growth rate at 15.7 per cent. According to Barclays, India is expected to register a 16 per cent GDP growth rate in the first quarter. The RBI expects India’s growth rate for the full year to be 7.2 per cent. According to the International Monetary Fund, India will grow at 7.4 per cent in the current financial year.

Economists argue that if the pace of growth slows in the remaining quarters, India’s dream goal of emerging as a $5 trillion economy by 2027-8 will be unattainable.

They reason that India is grappling with persistently high unemployment and inflation, which has been running above the top of the RBI’s tolerance band all year and is set to do so for the rest of 2022. The median expectation for 2022 growth is 7.2 per cent, according to an August 22-26 poll, but economists said that the solid growth rate masks how rapidly the economy is expected to slow in the coming months.

"Even as India remains the fastest-growing major economy, domestic consumption will perhaps not be strong enough to drive growth further as unemployment remains high and real wages are at a record low level," said Kunal Kundu, an economist at Societe Generale.

"By supporting growth through investment, the government has only fired on one engine while forgetting about the impetus which domestic consumption provides. This is why India's growth is still below its pre-pandemic trend."

The panelists believe that India has not grown fast enough to accommodate some 12 million people joining the labour force each year.

They fear that the country’s long-standing status as the world’s fastest-growing economy might be in peril on the back of weak domestic consumption, along with a potentially aggressive withdrawal of easy money by the US and Europe.

The recent warning by the US Federal Reserve chair Jerome Powell of that an “unusually large” rate hike was due in September is also a cause of concern for the Indian economy. The probability of a 300-325 basis point (bps) hike rose to 71.5 per cent on Monday from 55 per cent a week ago. All this seems to have spooked US stocks, and then the emerging markets. India’s benchmark stock indices, Nifty50 and Sensex, were trading nearly 1.5 per cent down each day. The largest MSCI index of Asia-Pacific stocks, of which India is a part, fell by 2.3 per cent following Powell’s speech. The index posted its largest decline since June 13.

Experts believe aggressive hikes in the developed economies would eat into the returns of Indian equities, while also pausing foreign interest in its stocks.

“The sharp rise in the dollar index above 109 and the 10-year bond yield spiking to 3.1 per cent are negative for capital flows to EMs [emerging markets] like India. FPIs [foreign portfolio investors] are unlikely to continue buying in India in this scenario,” said VK Vijaykumar, chief investment strategist at Geojit Financial Services.

Indian economy is also enduring inflation pressure from a weak rupee, which for months has been trading close to 80 to the dollar, a level the RBI has been defending in currency markets by selling dollar reserves.

The latest data showed India's current account deficit swelling to 3.1 per cent of gross domestic product this year, the highest in at least a decade, which may put further pressure on the currency.—

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