Fitch reduces India's FY23 GDP estimates by 80 basis points to 7%

Fitch, among the 3 top global rating agencies, has lowered the FY23 GDP growth estimates of the Indian economy by 80 bps to 7%. The last FY23 estimated made by Fitch in June 2022 had pegged the GDP growth for FY23 at 7.8%. The downgrade in growth is not just for FY23 but also for FY24. For instance, Fitch has also downsized the GDP growth estimates for FY24 by 70 basis points from 7.4% to 6.7%. The trigger for slower growth estimates came after the Q1FY23 GDP for the Indian economy came in lower than expected at just 13.5%.

In fact, there were varying estimates for Q1FY23 GDP growth ahead of the actual announcement on the last day of August. While Fitch had pegged the Q1FY23 GDP growth at 18.5%, RBI had pegged the growth at 16.2% while the Bloomberg consensus estimates were closer to 15.5%. However, the actual Q1FY23 GDP came in lower than all these at 13.5%. High frequency pressure was visible from the fact that the sequential quarter on quarter growth for the second quarter has been pegged at -3.2%.

One rather surprising data point anomaly is that the GDP high frequency numbers appear to be at odds with the other higher frequency indicators like the PMI manufacturing, GST collections, freight data, e-way bills etc. The PMI manufacturing and the PMI services have been robust and the GST collections have been at robust levels for the last few months in succession. However, that is not what the GDP data or the projections of GDP data seem to be indicating. Even Fitch projects appear to be at odds with the high frequency data.

Fitch expects the hawkishness to have a negative impact on the growth as it is likely to curtail industrial lending and most companies could put off capital investment plans. The RBI has already raised rates by 140 bps since it started in May this year. However, Fitch expects that the RBI could take the repo rates to 5.9% by the end of the year with a terminal repo rate target of 6.5% by next year. The RBI is intent on nipping inflation in the bud, but the downside is that it will also have negative repercussions for GDP growth in coming quarters.

Fitch also feels that Indian exports could be negatively impacted by an overall slowdown in the developed markets. The pressure on Indian exports is already visible as most of the items of exports are stagnant at this point of time. However, the imports of crude, fertilizers and minerals is continuing and that has been widening the trade deficit. In the last 2 years, post the COVID, the recovery of GDP was largely led by a surge in merchandise exports. With exports stagnating, Fitch expects the overall growth to also slow down.

There are several ways that the slowdown is going to hit Indian businesses. For instance, Fitch pegs the world economy to grow at just 2.4% in 2022, as against its previous estimate of 2.9%. UK and the EU are likely to dip into recession by the end of 2022. All this is not great news because US, UK and EU happen to be some of India’s largest export markets. Also, a slowdown in these markets will also slow down tech spending and impact the top line of Indian IT companies. All these are likely to have a negative impact on overall growth.

According to Fitch, central banks across the developed world have adopted a hawkish stance. This is likely to hit growth and the problem becomes more acute for countries like India which are depending on growth as a lever. Clearly, the message from the Fitch downgrade is that under hawkish conditions, growth is going to be a lot tougher to come by.