India fastest-growing major economy but risks persist, says Reuters poll

Driven by increased government spending ahead of the upcoming general election in May, India is set to claim the title of the fastest-growing major economy in the current fiscal year. However, economists, in a Reuters poll, have expressed concerns about downside risks to this optimistic forecast.

Over the past few years, Narendra Modi's government has ramped up spending on infrastructure projects, including roads and railways, contributing to India's resilience against the global economic slowdown. Despite these efforts, the government has struggled to generate sufficient employment opportunities.

According to the median forecasts from a poll of 65 economists conducted between September 20 and 26, India's economy is expected to grow by 6.2 per cent in the fiscal year ending in March 2024, followed by a 6.3 per cent growth rate in the subsequent fiscal year. These projections align with last month's predictions but reveal a wide range of estimates for the current fiscal year, spanning from 4.6 per cent to 7.1 per cent.

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However, economists emphasise that the expected growth remains below India's full potential. Furthermore, concerns have arisen regarding the impact of a drier-than-normal monsoon season, which could hinder economic performance in a country where agriculture employs roughly half of the workforce.

After an 7.8 per cent expansion in the last quarter, the growth rate is anticipated to moderate to 6.4 per cent in the current quarter and then decrease to 6.0 per cent in the October-December period, ultimately slowing to 5.5 per cent in early 2024.

Reuters quoted Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, as sayingthat India is currently experiencing a cyclical slowdown, with various factors, including a weak external environment, sluggish private consumption, and subdued investment, impacting economic growth.

A majority of economists, 22 out of 36, believe that the risks to their GDP growth forecasts for FY 2023-2024 are tilted towards the downside.

Regarding inflation, the poll indicates that India's retail inflation is expected to average 5.5 per cent this fiscal year and 4.8 per cent next, exceeding the Reserve Bank of India's (RBI) medium-term target of 4 per cent. Alarmingly, more than two-thirds of the surveyed economists, 23 out of 34, believe that the risks are skewed towards even higher inflation figures.

Despite the anticipation of inflation remaining above the target, economists foresee the next move by the RBI to be a rate cut. Nearly 60 per cent of the economists, 28 out of 48, predict that the RBI will cut rates by at least 25 basis points before July, with the median estimate placing the rate at 6.25 per cent in the second quarter of the following year. This potential rate cut aligns with expectations for similar moves by central banks globally.

In the upcoming Oct. 4-6 meeting, all but one of the 71 economists surveyed anticipate that the RBI will maintain its key repo rate at 6.50 per cent, with one economist expecting a 25 basis point increase. Median forecasts suggest that the rate will remain unchanged throughout the rest of the current fiscal year.

Reuters quoted Alexandra Hermann, lead economist at Oxford Economics as saying, "The RBI will likely tolerate supply-driven inflationary pressures as long as core prices continue to ease but will monitor the development of inflation expectations closely."

She also added that they still expected a rate cut early in 2024 and that the recent inflationary trends were making it increasingly likely that a policy tilt would be delayed. She also pointed out that government measures should have a cooling effect on food prices in the coming months, but rising oil prices would probably exert upward pressure on headline inflation.

(With inputs from Reuters)

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