Global slowdown. Moody's cuts India's growth projections to 7% for 2022

Moody’s Investor Services has lowered India’s economic growth forecast by 70 basis points to 7 per cent for the calendar year 2022. This is in line with the downward revision of the global growth forecast.

“The downward revision assumes higher inflation, high interest rates and slowing global growth will dampen economic momentum by more than we had previously expected,” the agency said in a report titled Global Macro Outlook 2023-24: Global economy faces a reckoning over inflation, geopolitics and policy trade-offs.’ Further it said that the weakening of the rupee and high oil prices continue to exert upward pressures on inflation, which has remained above the Reserve Bank of India’s (RBI) ‘4 per cent -/+ 2 per cent’ target inflation range for much of this year.

This is not the first downward revision of the Indian economy, though all the revisions are for the fiscal year. International Monetary Fund (IMF) cuts India’s GDP forecast for the current fiscal (the year 2022-23 or FY 23) by 60 basis points to 6.8 per cent from 7.4 per cent estimated earlier. Before that, World Bank cut the forecast by 1 percentage point to 6.5 per cent, ADB by 50 basis points to 7 per cent, Fitch by 80 basis points to 7 per cent and RBI cut the forecast by 20 basis points to 7 per cent. S&P Global and OECD have maintained the forecast at 7.3 per cent and 6.9 per cent, respectively.

Moody’s said that annual headline CPI inflation increased to 7.5 per cent in September after dipping below 7 per cent in July. Wholesale price inflation, however, has declined for four straight months, from a peak of 16.6 per cent in May to 10.7 per cent in September. From May to September, the RBI raised the repo rate a cumulative 190 bps to 5.9 per cent to contain inflation risks.

“We expect the RBI to raise the repo rate by another 50 bps or so as part of its objective to anchor inflation expectations and support the exchange rate. Eventually, the RBI will likely shift from inflation management to growth considerations, provided that the rate increases have the desired effect of taming inflationary pressures,” the agency said.

However, it acknowledged that underlying growth dynamics are fundamentally strong, boosted by a rebound in services activity. Government capital expenditure and manufacturing capacity utilization have also improved. September exports are down from the peak in March, but they are still around 30 per cent above the pre-pandemic level. Non-food credit growth shows solid momentum. The private sector, having deleveraged after the RBI’s Asset Quality Review in 2015, is now well-positioned to increase Capex spend.

Also, the Production Linked Incentive Scheme to attract investment in 14 key manufacturing sectors shows results. While these domestic strengths will continue to support the domestic growth narrative, global financial tightening and slowing external demand will pose downward pressure on growth in 2023, the report added.

Talking about the global economy, the agency said that it is on the verge of a downturn amid extraordinarily high levels of uncertainty amid persistent inflation, monetary policy tightening, fiscal challenges, geopolitical shifts and financial market volatility. “Global growth will slow in 2023 and remain sluggish in 2024. Still, a period of relative stability could emerge by 2024 if governments and central banks manage to navigate their economies through the current challenges,” it said.

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