The latest Fitch Ratings has cited a recovery in consumer spending and increased investment. File photo
| Photo Credit: The Hindu

Fitch Ratings on Tuesday, June 18, 2024, raised India’s growth forecast for current fiscal to 7.2 per cent, from 7 per cent projected in March, citing a recovery in consumer spending and increased investment.

For the fiscal years 2025-26 and 2026-27, Fitch projected growth rates of 6.5 per cent and 6.2 per cent, respectively.

“We expect the Indian economy to expand by a strong 7.2 per cent in FY24/25 (an upward revision of 0.2 pp from the March GEO),” Fitch said in its global economic outlook report.

Fitch’s estimates are in line with that of RBI which earlier this month projected Indian economy to expand 7.2 per cent in the current fiscal on the back of improving rural demand and moderating inflation.

Investment to continue, consumer spending to pick up

Investments will continue to rise but more slowly than in recent quarters, while consumer spending will recover with elevated consumer confidence, it said.

Fitch said purchasing managers survey data point to continued growth at the start of the current financial year.

It said signs of the coming monsoon season being more normal should support growth and make inflation less volatile, though a recent heatwave poses a risk.

“We expect growth in later years to slow and approach our medium-term trend estimate,” it said, adding growth will be driven by consumer spending and investment.

The Indian economy grew 8.2 per cent in the last fiscal (2023-24), with a 7.8 per cent expansion in March quarter.

Inflation, Fitch expects, will decline to 4.5 per cent by end 2024 and average 4.3 per cent in 2025 and 2026.

Fitch said it expects the RBI to cut policy interest rates by 25 basis points this year to 6.25 per cent.

The 6.9% economic growth projections for India in the mid-year update is an upward revision from the 6.2% GDP forecast made by the U.N. in January.
| Photo Credit: B. Jothi Ramalingam

The United Nations has revised upwards India’s growth projections for 2024, with the country’s economy now forecast to expand by close to 7% this year, mainly driven by strong public investment and resilient private consumption.

The World Economic Situation and Prospects as of mid-2024, released Thursday, said, “India’s economy is forecast to expand by 6.9% in 2024 and 6.6% in 2025, mainly driven by strong public investment and resilient private consumption. Although subdued external demand will continue to weigh on merchandise export growth, pharmaceuticals and chemicals exports are expected to expand strongly.”

The 6.9% economic growth projections for India in the mid-year update is an upward revision from the 6.2% GDP forecast made by the U.N. in January this year. The U.N. World Economic Situation and Prospects (WESP) 2024 report that was launched in January had said that growth in India was projected to reach 6.2% in 2024, amid robust domestic demand and strong growth in the manufacturing and services sectors. The projection in January for India’s GDP growth for 2025 remains unchanged at 6.6% in the latest assessment of the economic situation.

The update said that consumer price inflation in India is projected to decelerate from 5.6% in 2023 to 4.5% in 2024, staying within the central bank’s two to six per cent medium-term target range. Similarly, inflation rates in other South Asian countries declined in 2023 and are expected to decelerate further in 2024, ranging from 2.2% in the Maldives to 33.6% in Iran. Despite some moderation, food prices remained elevated in the first quarter of 2024, especially in Bangladesh and India.

In India, labour market indicators have also improved amid robust growth and higher labour force participation, it said. India’s government remains committed to gradually reduce the fiscal deficit, while seeking to increase capital investment.

South Asia’s economic outlook is expected to remain strong, supported by a robust performance of India’s economy and a slight recovery in Pakistan and Sri Lanka. Regional GDP is projected to grow by 5.8% in 2024 (an upward revision of 0.6 percentage points since January) and 5.7% in 2025, below the 6.2% recorded in 2023. However, still tight financial conditions and fiscal and external imbalances will continue to weigh on South Asia’s growth performance. In addition, potential increases in energy prices amid geopolitical tensions and the ongoing disruption in the Red Sea pose a risk to the regional economic outlook, it said.

The world economy is now forecast to grow by 2.7% in 2024 (an increase of 0.3 percentage points from the forecast in January) and 2.8% in 2025 (an increase of 0.1 percentage points).

The upward revisions mainly reflect a better outlook in the United States, where the latest forecast points to 2.3% growth in 2024 (an upward revision of 0.9 percentage points since January), and several large emerging economies, notably Brazil, India and Russia.

It noted that several large developing economies – Indonesia, India and Mexico – are benefiting from strong domestic and external demand. In comparison, many economies in Africa and Latin America and the Caribbean are on a low-growth trajectory, facing high inflation, elevated borrowing costs, persistent exchange rate pressures and lingering political instability. The possible intensification and spreading of conflicts in Gaza and the Red Sea add further uncertainties to the near-term outlook for the Middle East, the mid-year update said.

Global trade is expected to recover in 2024. The early boost to trade flows in the first months of the year can be attributed to destocking of the inventory that piled up amid supply-chain disruptions in 2021-22. “China’s foreign trade grew faster than expected in the first two months in 2024, driven largely by exports to emerging markets, particularly to Brazil, India and Russia,” it said.

However, persistent geopolitical tensions in the Middle East and disruptions in the Red Sea, and escalating cost of freight continue to pose challenges to global trade, it added.

The mid-year update said global economic prospects have improved since January, with major economies avoiding a severe downturn, bringing down inflation without increasing unemployment. However, the outlook is only cautiously optimistic. Higher-for-longer interest rates, debt sustainability challenges, continuing geopolitical tensions and ever-worsening climate risks continue to pose challenges to growth, threatening decades of development gains, especially for least developed countries and small island developing states.

The outlook for China registers a small uptick with growth now expected to be 4.8 per cent in 2024, from 4.7 per cent projected in January. China’s growth is projected to moderate to 4.8% in 2024, from 5.2% in 2023. Pent-up consumer demand – released after the lifting of pandemic-related restrictions – has largely dissipated. While enhanced policy support is expected to boost investments in public infrastructure and strategic sectors, the property sector poses a significant downside risk to the Chinese economy, it said.

For representative purposes.
| Photo Credit: Getty Images

The conventional way to assess a country’s economic situation is to look at the quarterly (three-month) and annual (12-month) GDP (gross-domestic-product) growth rate and compare it to previous quarters as well as years. In the quarterly release of GDP figures by the NSO (National Statistical Office), the country’s performance is likened to reviewing a report card of its economic performance. However, a critical difference between reviewing a report card and India’s economic figures is that the latter tells a far more nuanced story.

The Q1 data covering the GDP growth rate from April to June of FY24 boasts a nominal growth rate of 8% and a real growth rate of 7.8%. The growth story currently posits that the numbers reflect an uptick in the agriculture sector growing at 3.5%, unlikely to be sustained due to pressure from the El Niño phenomenon, and the services industry, with financial, real estate and professional services growing at 12.2%. Moreover, there is also talk of sustaining a close to 6.5% growth rate for the current financial year. However, a closer look at the numbers provides a far more interesting interpretation of the growth.

Calculating GDP

The first factor to consider is that calculating the GDP growth rate involves many complex statistical choices and sophisticated statistical operations. One such decision the NSO made while conducting their research was to use the income approach of calculating GDP rather than the expenditure approach. The income approach involves summing up all national incomes from the factors of production and accounting for other elements such as taxes, depreciation, and net foreign factor income. The assumption generally is that both methods lead to similar results.

However, the expenditure approach dictates headline growth to be 4.5% rather than 7.8% which is a large discrepancy. Moreover, another essential statistical operation is the adjusting for inflation using the price deflator. Typically, the deflator is meant to adjust growth figures when they are overstated by inflation. In this case, deflation due to falling commodity prices, reflected in the wholesale price index, has worked to overstate the real growth. Furthermore, there is a base effect from the COVID-19 degrowth period, which continues to plague India’s growth figures. Although less pronounced in FY24, the base effect has a role in comparative statistics due to sporadic growth in the years following FY20-21.

Additionally, one must consider whether the proposed, supposedly cooled, inflation rate calculated through the consumer price index can be sustained at current levels with the impending depreciation of the Indian rupee against the dollar due to capital outflow pressures resulting from the RBI’s reluctance to raise interest rates. India is a net importer, and its most significant import consists of crude petroleum, whose price seems to be rising due to Saudi’s $100 per barrel push and rupee depreciation. The domestic consumption of diesel, a proxy for economic activity in India, fell by 3% in August, which, if sustained, does not paint a rosy growth picture for the coming quarters.

Revenue from taxes

Moreover, the government’s tax revenue from direct taxes has weakened over the previous quarter while the indirect tax revenue remained strong, indicating a K-shaped pattern. The income streams from progressive taxation (more significant tax burden on those higher on the income ladder) seem to be a laggard compared to its regressive counterpart. A muted growth of direct tax collected in an economy boosted by the services industry is a statistical discrepancy which remains unexplained in the proposed GDP growth story. Direct and personal taxes should (in the absence of any significant policy changes) have grown closer to the nominal growth rate than it has currently. Narrowing revenue streams indicate forced austerity measures, as the government intends to control the budget deficit, and hence the interest rate. Therefore, growth in FY24 stemming from government expenditure seems to be a pipe dream.

A nuanced approach

In conclusion, after a meticulous analysis of India’s Q1 FY24 economic transcript, it becomes palpable that the reported growth narrative might be somewhat overembellished. The divergence in growth figures brought forth by the income and expenditure approaches manifest a significant disparity, raising fundamental questions about the veracity of the promulgated optimistic narrative. Moreover, the underpinnings of this growth story, nuanced by inflationary adjustments and conspicuous fluctuations in tax revenue streams, signal a cautious trajectory. Additionally, the apprehensive outlook on the agriculture sector and potential fiscal constraints paint an arguably more restrained picture than initially portrayed. Therefore, it seems prudent to assert that India’s economic performance, although showing signs of resilience, does not quite emerge as the unequivocal success story depicted in initial observations, urging a more nuanced and critical approach in assessing the trajectory ahead.

Anand Srinivasan is a consultant and Sashwath Swaminathan is a research assistant at Aionion Investment Services

Moody’s on August 18 affirmed India’s sovereign rating at ‘Baa3’ with a stable outlook and said high growth will support a gradual increase in income levels, which will further contribute to economic strength.
| Photo Credit: Reuters

Moody’s on August 18 affirmed India’s sovereign rating at ‘Baa3’ with a stable outlook and said high growth will support a gradual increase in income levels, which will further contribute to economic strength.

Moody’s said it expects India’s economic growth to outpace all other G20 economies through at least the next two years, driven by domestic demand.

“Moody’s Investors Service has today affirmed the Government of India’s long-term local and foreign-currency issuer ratings and the local-currency senior unsecured rating atBaa3. Moody’s has also affirmed India’s other short-term local-currency rating at P-3. The outlook remains stable,” it said in a statement.

Baa3 is the lowest investment grade rating.

All three global rating agencies, Fitch, S&P and Moody’s, have the lowest investment grade rating on India, with a stable outlook. The ratings are looked at by investors as a barometer of a country’s creditworthiness and affect borrowing costs.

It said although potential growth has come down in the past 7-10 years, the Indian economy is likely to continue to grow rapidly by international standards.

“High GDP growth will contribute to gradually rising income levels and overall economic resilience. In turn, this will support gradual fiscal consolidation and government debt stabilization, albeit at high levels. In addition, the financial sector continues to strengthen, alleviating much of the economic and contingent liability risks that had previously driven downward rating pressure,” Moody’s said.