Girja Shankar Kaura
Moody’s Investors Service has lowered the 2022 real GDP growth projections for India to 7.0% from 7.7%. In its Global Macro Outlook 2023-24, Moody’s says that growth in India would ecelerate to 4.8% in 2023 and then to rise to around 6.4% in 2024. The downward revision assumes higher inflation, high interest rates and slowing global growth will dampen economic momentum by more than we had previously expected. The weakening of the rupee and high oil prices continue to exert upward pressures on inflation, which has remained above the Reserve Bank of India’s (RBI) target inflation range for much of this year. Annual headline CPI inflation increased to 7.5% in September after dipping below 7% in July.
Wholesale price inflation, however, has declined for four straight months, from a peak of 16.6% in May to 10.7% in September. From May to September, the RBI raised the repo rate a cumulative 190 bps to 5.9% in an effort to contain inflation risks. “We expect the RBI to raise the repo rate by another 50 bps or so as part of its objective to anchor inflation expectations and support the exchange rate. Eventually, the RBI will likely shift from inflation management to growth considerations, provided that the rate increases have the desired effect of taming inflationary pressures,” it said.
Underlying growth dynamics are fundamentally strong, boosted by a rebound in services activity, but a weak rupee is playing the spoilsport. Government capital expenditure and manufacturing capacity utilization have also improved. September exports are down from the peak in March, but they are still around 30% above the pre-pandemic level. Nonfood credit growth shows solid momentum.
The private sector, having deleveraged after the RBI’s Asset Quality Review in 2015, is now well-positioned to increase capex spending. Also, the Production Linked Incentive Scheme to attract investment in 14 key manufacturing sectors is showing results. While these domestic strengths will continue to support the domestic growth narrative, global financial tightening and slowing external demand will pose downward pressure on growth in 2023.
Moody’s said that the global economy is on the verge of a downturn amid extraordinarily high levels of uncertainty amid persistent inflation, monetary policy tightening, fiscal challenges, geopolitical shifts and financial market volatility. Global growth will slow in 2023 and remain sluggish in 2024.
Still, a period of relative stability could emerge by 2024 if governments and central banks manage to navigate their economies through the current challenges. “We have lowered our global economic growth expectations. We expect real GDP growth of the G-20 economies to decelerate to 1.3% in 2023, significantly lower than our previous estimate of 2.1% and down from an estimated 2.5% growth this year. Declining economic activity in advanced economies, notably in Europe and North America, will drive the sharp moderation in 2023 growth.” In 2024, global economic activity will accelerate but only to a below-trend 2.2% growth rate.
Quantitative tightening, rising rates and the ascendant US dollar pose financial stability risks. The decisive end to the decade-long era of low interest rates and quantitative easing has generated large financial losses in asset values around the world, raised dollar funding costs and widened credit spreads. So far, the adjustment to higher rates has come without a large systemic financial event with global implications, and our baseline forecasts assume that central banks will avoid a disorderly tightening of financial conditions.
The agency has also reduced a number of G-20 country forecasts, with risks shifting further to the downside. It has lowered growth forecasts for the US, China, several European countries, Japan, and India, among others. Growth outcomes of the G-20 emerging market economies will vary depending on economic structures. For instance, large domestically driven emerging market economies such as India and Brazil will be less vulnerable to weakening G-7 growth than will export-oriented countries.
Russia’s war on Ukraine will remain the central geopolitical risk to the larger macroeconomic picture. While we assign a very low probability to the potential for the conflict to broaden beyond Ukraine’s borders, such an event would mark a significant escalation, creating further and severe downside economic risks. Geopolitical considerations will increasingly drive economic policies globally, as great-power relationships turn ever more confrontational.
