Moody’s cuts India’s GDP estimates for 2022 by 70 bps to 7%

One of the world’s leading rating agencies, Moody’s Investors Services, has cut India’s GDP growth projections for FY22 by 70 basis points from 7.7% to 7.0%. This refers to calendar year estimates of Moody’s. The agency has identified higher inflation rising interest rates and the lag effect of a global slowdown as the key drivers of lower growth in 2022. In addition, for calendar year 2023, Moody’s expects the GDP growth to slow to 4.8%, but it is estimated to bounce back to 6.4% in the calendar year 2024. However, the 2022 growth is expected to still be about 400 bps better than that of China.

This is the second in the series of growth estimate cuts by Moody’s. Earlier in the month of September 2022, Moody’s had cut India’s growth forecast by 110 basis points from 8.8% to 7.7%. So effectively, between September and November 2022, Moody’s has cumulatively downsized India’s 2022 GDP growth estimated by 180 basis points from 8.8% to 7.0%. Moody’s has specifically pointed out that India still suffers from a lot of imported inflation as high oil prices and a weak rupee were exerting a lot of pressure on the level of inflation in India and that was likely to persist for some more time to come.

In fact, the RBI had recently fallen short of its inflation targets for 3 quarters in succession, which had resulted in the RBI having to give a detailed explanation to the government with remedial measures. The RBI had set a target median inflation of 4% with an outer limit of 2% on the downside and 6% on the upside. While the 4% mark was breached for more than 35 months in succession, even the 6% mark has now been breached by the Indian economy for 3 quarters in succession. Despite the RBI hiking rates by 190 bps till date since May 2022, the inflation has almost been relentless due to cost push factors and imported inflation.

However, there is good news in the form of wholesale inflation or WPI inflation. After touching a high of 16.6% in May 2022, WPI inflation fell to 10.7% in September and further to 8.39% in October 2022. That is a sharp fall and WPI inflation is normally a lead indicator for consumer or CPI inflation. The inflation monster has been sticky, not only in India but also in other countries like the US and UK as well as in the EU region. Moody’s has also hinted that the RBI may immediately take the rate of inflation well above the 5% mark with another 50 bps rate hike to ensure that any lag effect of inflation is nipped in the bud.

However, Moody’s has pointed out that amidst all these headwinds, the underlying growth story in India has been rather strong. For instance, most of the high frequency indicators like PMI manufacturing, PMI services, GST collections, E-way bills etc have pointed to very robust growth in the economy. That is also evident from a sharp bounce in the core sector growth and the IIP number for the month of September. According to Moody’s India’s growth has been largely driven by government capex and improved manufacturing capacity utilization. However, exports remain a concern, although they are above pre-COVID levels.

However, Moody’s expects that there are important positive triggers for the Indian economy. For starters, there has been a substantial deleveraging by the private sector, which leaves them with a lot of headroom for further capex spending. Moody’s is also positive on the ability of the Production Linked Incentive (PLI) Scheme to attract investment in 14 key manufacturing sectors. However, global factors may remain an overhang. However, that is still better than the expected GDP growth of China for 2022, which has been pegged by Moody’s 50 bps lower at 3%. That is likely to work in favour of India.

Moody’s feels that the worst of the dollar strengthening may also be behind. For instance, the Bloomberg Dollar Index (DXY) has appreciated by 14.2% against the currencies of developed markets and by 7.4% against EMs. However, the recovery would be faster for currencies where the growth levers are strong. That should work in favour of India.