India set to lose fastest-growing major economy title

(Representative image)

India is set to lose its fastest-growing major economy tag this year, as growth took a hit from weakening demand at home and abroad.

Gross domestic product will grow 7% in the fiscal year ending March, according to the first official estimate released by the Statistics Ministry Friday. That compares with a 6.8% expansion forecast by the Reserve Bank of India, as well as the median estimate in a Bloomberg survey of economists.

That performance follows an 8.7% pace of expansion in the previous year and will be second only to Saudi Arabia’s expected 7.6% growth, thanks to gains from a spike in energy prices.

The Indian government uses the advance estimate to decide its spending priorities in the upcoming federal budget on Feb. 1, which will also be the last full-year expenditure plan of Prime Minister Narendra Modi’s government before elections in 2024.

“The headline numbers are in-line with our estimate,” said Aditi Nayar, economist at ICRA Ltd. in New Delhi. Buoyant, albeit mixed domestic consumption should be able to stave off some pain from weak exports, she added.

India had a good start to the current fiscal year, with expectations that pent-up demand will drive recovery in Asia’s third-largest economy. But the optimism quickly faded as an unprecedented monetary policy tightening by central banks to tamp down high inflation is pushing many advanced economies toward a recession, and is tempering growth in others.

The Reserve Bank of India, which has raised its benchmark rate by 225 basis points so far this fiscal, isn’t done with tightening yet. Most economists expect the central bank to deliver another quarter-point of tightening at its next policy review on Feb. 8 as core inflation remains sticky.

Gross value-added, which strips out tax and subsidy transfer payments, is seen growing 6.7%. Manufacturing output is estimated to rise 1.6%, while the mining sector is expected to gain 2.4% and agriculture 3.5%.

Gross fixed capital formation, a proxy for investment, is forecast to increase 11.53%, whereas government spending is expected to climb 3.11%. Private consumption is seen to grow at 7.68%.

A healthy growth in gross fixed capital formation shows the sustained focus of the government on capital expenditure and is providing necessary support to the ongoing recovery, said Sunil Sinha, an economist at India Ratings and Research Pvt., a local unit of Fitch Ratings Ltd. But for sustainable growth and recovery of the Indian economy revival of private corporate sector capex is a must, he added.