Revisions plague economic growth forecasts. India's home turf prompts the cuts

India, among the fastest growing G20 economies, has seen sharp cuts to its growth forecasts for this year and the next.

While the economy faces headwinds from global growth slowdown, which will hurt outbound shipments, the prognosis for domestic activity is also being seen as uncertain despite positive commentary by listed companies.

“Domestic consumption is unlikely to remain robust beyond festivity-led pent-up demand following the economic re-opening after the third pandemic wave,” Kunal Kumar Kundu, India economist at Societe Generale, said in a note recently.

India’s economy has recovered to the pre-pandemic levels but the growth is still below its pre-pandemic trajectory. The Reserve Bank of India expects the economy to grow 7 percent in the financial year ending March 31, sharply lower than the 7.8 percent it had estimated earlier this year.

Several economists had also forecast growth at levels of around 8 percent earlier this year. The estimates were lowered in the aftermath of the Russia-Ukraine war, recession concerns in the West and the sharp monetary tightening across several developed and emerging economies.

The International Monetary Fund (IMF) this month cut India’s growth forecast for this fiscal year by 60 basis points to 6.8 percent. In July, the multilateral agency had cut the forecast by 80 basis points.

Several other agencies, including the World Bank and OECD, have also slashed their India growth estimates in the recent weeks.

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Domestic Drag

Societe Generale’s Kunal Kumar Kundu expects high inflation, negative real wage growth and an elevated unemployment rate will act as strong headwinds to growth.

While the recent growth cuts are clearly driven by concerns about the global growth slowdown taking hold, there seems to be too much emphasis given on the impact of external factors.

“We believe that higher growth estimates earlier failed to factor in the internal challenges that resulted in a weaker economic recovery than was envisaged,” Kundu said.

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India accounts for less than 2 percent of global merchandise trade.

As such, the impact of the global growth slowdown on gross domestic product for the current year is unlikely to be of any great magnitude.

India’s weak labour market recovery, shaky consumer confidence and inadequate business investments are major impediments to a faster pace of recovery. With investments staying weaker than expected, and consumption as well, given that employment generation could be muted, Societe Generale expects growth at 6.9 percent this fiscal and 6.5 percent in the next.

The finance ministry estimates the country’s medium-term growth rate above 6 percent. It has been relying on pushing infrastructure spending to boost the economy's growth prospects.

“Although the government is right on the money, we believe, in terms of actual and proposed infrastructure spending, with multiple policies aimed at supporting infrastructure development, this has so far remained the lone bright spot for the economy,” Kundu said.

The investment-led growth driver is firing on only one engine as non-infrastructure business investment has been conspicuous by its absence, he added.