Moody’s cuts India GDP growth forecast to 7% for 2022

Joining other global agencies in trimming India's GDP forecast for 2022, the US-based global ratings agency Moody's Investors Service has lowered India's growth projections to 7% from 7.7% earlier due to the weak rupee and high oil prices. Despite downward revisions, India remains the world's largest-growing economy in 2022.

This marks the second downward revision in India's 2022 growth estimates by Moody's. From 8.8% in May, the ratings agency had cut India's GDP growth estimate to 7.7% in September.

Now from 7% in 2022, the GDP growth will decelerate to 4.8% in 2023 but will rise to around 6.4% in 2024, forecasts the ratings agency.

"The downward revision assumes higher inflation, high-interest rates and slowing global growth will dampen economic momentum by more than we had previously expected," Moody's said in its Global Macro Outlook 2023-24.

The two major culprits responsible for Moody's downward forecast for India are the weak rupee and high oil prices. Both continue to exert upward pressures on inflation, which has remained above the Reserve Bank of India's (RBI) 4% -/+ 2% target inflation range for much of this year.

Notably, India's annual headline CPI inflation increased to 7.5% in September after dipping below 7% in July. The wholesale price inflation, however, has declined for four straight months, from a peak of 16.6% in May to 10.7% in September.

In order to contain inflation, the RBI has consistently raised the repo rate -- by 190 bps to 5.9% from May to September -- and it's expected to further raise it up by 50 bps.

"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," said Moody's.

Moody's says India's underlying growth dynamics are fundamentally strong, boosted by a rebound in services activity. It says while domestic strengths will continue to support the growth narrative, global financial tightening and slowing external demand will pose downward pressure on growth in 2023.

"Government capital expenditure and manufacturing capacity utilisation have also improved. September exports are down from the peak in March, but they are still around 30% above the pre-pandemic level. Nonfood 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 spending. Also, the Production Linked Incentive Scheme to attract investment in 14 key manufacturing sectors is showing results," the agency said.

The current projections by Moody's come after IMF last month cut India's economic growth in 2022 to 6.8% from 7.4% previously. The IMF, however, said the strong recovery in South Asia is expected to take a breather, with India’s economy expanding at 6.8% in 2022, because of a weaker-than-expected recovery in the second quarter and subdued external demand. IMF's estimates show India's economy will grow by 6.1% in 2023, as external demand and a tightening in monetary and financial conditions weigh on growth.

Another major global financial institution Morgan Stanley has said India will become the third-largest economy by 2027 after the US and China on the back of favourable domestic policies and a focus on boosting investment and jobs. This will propel its GDP from $3.4 trillion currently to $8.5 trillion over the next decade.