InvestorQ : Why has Fitch cut India’s GDP forecasts for FY23 to lower levels?
manisha Kolvenkar made post

Why has Fitch cut India’s GDP forecasts for FY23 to lower levels?

Crowny Pinto answered.
3 weeks ago

Last week, rating agency Fitch cut India’s FY23 GDP growth estimates by 80 basis points from 7.8% to 7.0%. At the same time, Fitch has also downsized India’s GDP growth rate for FY24 by 70 basis points from 7.4% to 6.7%. Fitch triggered the downsizing of GDP after the Q1FY23 GDP for the Indian economy came in sharply lower than expected at just 13.5%. In fact, Fitch had pegged the Q1FY23 GDP growth at over 18% while even the RBI had pegged the first quarter growth at 16.2%. The actual figure of 13.5% was relatively disappointing.

It is actually rather interesting that there is a mismatch between the high frequency GDP growth on the one hand and the routine higher frequency indicators on the other hand. For instance, some of the high frequency indicators like PMI manufacturing, GST collections, freight data and e-way bills continue to be robust while the actual GDP data is showing a rather tepid picture. But we will leave this dichotomy in data aside for the time being and focus on the GDP data that is showing high frequency pressure for the time being.

Essentially, Fitch believes that central bank hawkishness would have a negative impact on GDP growth as it would curtail industrial lending and companies would put off capital investment plans. RBI has hiked rates by 140 bps and looking at the hawkishness of the Fed it looks like the RBI may also take the rates from the current 5.4% to around 6% by the end of 2022 and further to 6.5% by middle of 2023. RBI focus on nipping inflation in the bud could end up with negative repercussions for GDP growth in coming quarters.

Fitch has pointed to pressure from two fronts viz. export of goods and IT exports. Pressure on merchandise exports is visible with exports stagnant at around $33 billion even as imports are rising. Growth recovery in the 2 years, post-COVID was largely triggered by surge in merchandise exports. The second concern is that it pegs the world economy to slow to 2.4% and UK and EU to enter recession by end of 2022. That would mean weaker growth in the west, weaker technology spending and pressure on volumes and pricing for IT players.