India’s GDP growth cycle may need to weather the 'storm' in the medium term: Nomura

In the medium term, domestic mass consumption will take a hit from inflation and companies passing on costs to customers. (Photo by KULDEEP LAGDHIR/Pexels)

India’s GDP growth in the near-term looks stable but will face trouble in the medium term, said Nomura’s Asia Insights note.

The note was titled “India: near-term calm, medium-term storm”.

While concurrent indicators (that track current economic conditions) are looking up–aggregate demand and aggregate supply are 15pp and 9pp above pre-pandemic levels–leading indicators (that track future conditions) “point towards caution”, said its note. One of the brokerage’s indices, which has a quarter lead over non-agricultural GDP growth, has dropped from 106.8 in Q4CY21 to 104.9 in Q1CY22 and falls further to 102 in Q2CY22.

That is, “the underlying cyclical trend is pointing lower”. 

Also, with inflation set to rise significantly above previous predictions, it expects the central bank to raise hikes by 200bps (2pp) by Q3FY23. The rate hikes are expected to start in June with 25 bps (.25pp).

Medium-term challenges

In the medium term, domestic mass consumption will take a hit from inflation and companies passing on costs to customers, and uneven economic recovery, according to the brokerage. While the central bank has revised its inflation forecast upwards to 5.7 percent (from 4.5 percent) for FY23, Nomura expects inflation to touch a much higher figure for the fiscal at 6.6 percent. It has taken this view “in light of the pending increases in fuel prices, higher commodity prices, upside risks to food prices, reopening pressures and elevated inflationary expectations”.

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Also, in the medium term, exports will be hurt by the weakening in global growth from the Russia-Ukraine standoff, China’s lockdowns and tighter financial conditions. Nomura expects “the external sector outlook to worsen from mid-2022 onwards”. 

While there are reports of the fourth wave coming, the brokerage believes it is “too early to view this as a significant downside risk for growth”. This is because “economies are learning to live with the virus; newer variants are infectious but not as deadly; and there is reduced public and policy appetite for a return of serious restrictions”.

It also expects future waves’ disruptive influence on economic sentiment to weaken.