Day after Q1 GDP data, a spate of forecast cuts by banks, institutions

A day after the National Statistical Office released the April-June quarter (first quarter, or Q1) of 2022-23 (FY23) gross domestic product (GDP) data, a number of banks and financial institutions slashed their economic growth estimates for the current fiscal year (FY23). These included State Bank of India (SBI), Goldman Sachs, Citigroup, and ratings agency Moody’s.

Citigroup sharply cut its FY23 growth projection to 6.7 per cent, from 8 per cent earlier, while Goldman Sachs revised it to 7 per cent, from 7.2 per cent earlier. Deutsche Bank said that slow growth may prompt the Reserve bank of India (RBI) to ease up on the quantum of rate hikes.

Moody’s cut its forecast to 7.7 per cent, from 8.8 per cent, citing dampening economic momentum in the coming quarters on rising interest rates, uneven monsoon, and slowing global growth.

“Although GDP grew in double digits, it still came below market expectations. The primary culprit was growth in the manufacturing sector which grew by a measly 4.8 per cent in Q1,” SBI’s Chief Economic Advisor Soumya Kanti Ghosh said in a report. Ghosh cut his FY23 GDP growth forecast to 6.8 per cent, from 7.8 percent.

India’s economy grew below expectations at 13.5 per cent in Q1FY23, notwithstanding the low base of the equivalent period of 2021-22, when economic activity was severely impacted by the Delta wave of the pandemic. Sequentially, GDP contracted 9.6 per cent in Q1FY23, compared with the fourth quarter of 2021-22. The RBI had projected Q1FY23 GDP growth at 16.2 per cent.

The data showed that while the services sector lifted growth during the quarter, activity in trade, hospitality, and transport was below pre-pandemic levels of Q1 of 2019-20 (FY20).

Ghosh said a lower growth in the manufacturing sector is a reflection of pandemic-induced uncertainties that seem to have impacted margins. He said profit growth had also slowed in Q1FY23.

“Trade, hotels, transport, communication and services related to broadcasting are still 15 per cent lower than pre-pandemic levels. Despite expanding by a whopping 25.7 per cent, these are still ~1 trillion less than FY20 levels,” said Ghosh.

“Fast-moving consumer goods results show tepid demand as rising retail inflation exerted pressure on the share of its wallet. Furthermore, rural growth continues to lag growth in urban markets. In the near term, inflation will continue impacting consumption until it starts to decline meaningfully,” he said.

Ghosh also added that the estimation of manufacturing sector growth needs serious introspection in the sense that industrial output is still indexed at 2012 base.

“The Consumer Price Inflation (CPI) basket has also not changed since 2012. This has also possibly resulted in overstating CPI inflation at multiple times,” he said.

Goldman Sachs economist Santanu Sengupta said, “Despite the main drivers of domestic demand coming in line with our expectations, a large drawdown in inventories and statistical discrepancies came as a surprise.”

Slowing growth and inflation still holding above the RBI’s comfort zone will make the monetary authority’s job a difficult one, he added.

A sudden stalling of growth momentum “could sow some seeds of doubt in their emphasis on the 4 per cent CPI target”, Citi economists Samiran Chakraborty and Baqar M Zaidi wrote in a report.

“The emergence of downside risk to growth and upside risk to inflation will further complicate the RBI’s aim of calibrated monetary policy actions,” they wrote.

On monetary policy action, Moody’s differed from the assessment of the banks and said the RBI is likely to maintain a reasonably tight policy stance in 2023 to prevent domestic inflationary pressures from building up.

“Our expectation that India’s real GDP growth will slow from 8.3 per cent in 2021 to 7.7 per cent in 2022 and to decelerate further to 5.2 per cent in 2023 assumes that rising interest rates, uneven distribution of monsoon, and slowing global growth will dampen economic momentum on a sequential basis,” said Moody’s.

Moody’s said services and manufacturing sectors have seen robust upswings in economic activity, according to the hard and survey data, such as the Purchasing Managers’ Index, capacity utilisation, mobility, tax filing and collection, business earnings, and credit indicators.

On downward revision in growth forecast, Moody’s said the outlook continues to weaken, particularly as financial conditions have tightened, following moves by central banks to tamp down persistent inflation.