Hyderabad: India Ratings and Research, a Fitch Group rating agency, Wednesday upwardly revised its country’s GDP growth forecast for the current financial year from 5.9 per cent to 6.2 per cent, an increase of 30 basis points due to a variety of global and domestic factors.
In a statement sent to ETV Bharat, the rating agency said that there are a number of factors that are supporting the economic recovery such as higher capital expenditure by the government, and deleveraged balance sheets of Indian corporate and banks. These positive factors also include a likelihood of subdued global commodity prices (raw material), and above all the possibility of a new capital expenditure cycle by the country’s private sector.
As a result of these positive factors, the rating agency said, the country’s economic growth in the current financial year (April 2023 to March 2024 period) is likely to be much higher than its earlier forecast of 5.9 per cent.
India Ratings and Research is part of the Fitch Group which is one of the big three sovereign rating agencies. The other two global rating agencies are Moody’s and Standard and Poor’s.
The agency, however, warned that there are constraints as well. For example, a sluggish global economy is putting pressure on India’s exports which recorded a contraction in the first three months (April-June) of the current financial year.
What is driving India’s economic growth?
According to the analysts at the rating agency, both the Centre and state government’s capital expenditures have registered healthy growth. This positive factor is supported by the possibility of the private sector pitching in the country’s growth story by investing more.
According to the agency, the Gross Fixed Capital Formation (GFCF) will grow by 10.1 per cent in the current financial year. It has recorded a higher growth rate of 11.4 per cent in the last financial year on a year-on-year basis. It will be mainly due to a sustained increase in the government’s capital expenditure as the government is building more roads, airports, seaports, expanding metro and rail network and spending heavily on other infrastructure projects to support economic recovery.
As per the latest data analysed by the agency, while the Centre's capital expenditure grew 45.3 per cent on a year-on-year basis in the first quarter of this fiscal, state governments’ capital expenditure for 20 large states registered an impressive increase of over 75 per cent during the same period.
Expenditure on the capital account and grants-in-aid for the creation of capital assets together in the union budget FY24 has been pegged at 4.54 per cent of the country’s GDP. It was 3.86 per cent for the last financial year as per the revised estimates. The agency said the private sector’s greenfield capital expenditure barring a few sectors has remained down and out now for several years.
However, according to a study published in the RBI Bulletin for August 2023 titled Private Corporate Investment: Performance and Near-term Outlook, a new private corporate capital expenditure cycle is in the offing and private capital expenditure spend could reach a decadal high in the current financial year, it said.
Where does the private sector invest?
According to the agency’s analysis, besides capital expenditure in crude oil, base metals, power and telecom, broad basing is visible with heightened capex activity across cement, chemicals, textile, healthcare, logistics etc. Although Uttar Pradesh, Gujarat and Maharashtra continue to dominate fresh capex sanctions, Odisha is coming up with projects across textile, steel and power sectors, it said.
All these positive factors have led the rating agency to upwardly revise its GDP growth forecast for the country for the current financial year from 5.9 per cent to 6.2 per cent.
Challenges to India’s economy
However, there are challenges as well as due to a variety of domestic and global factors, the country’s GDP which expanded by 7.8 per cent in the first quarter is expected to sequentially decline in the next three quarters. The agency estimates that the country’s quarterly GDP growth will decline to 6.9 per cent in the second quarter and then further decline to 5.4 per cent and 5 per cent in the third and fourth quarter respectively.
According to the International Monetary Fund (IMF), the global GDP growth will fall to 3 per cent both in 2023 and 2024 from 3.5 per cent in 2022. Naturally, sluggish growth or a recession in some of the advanced economies will weigh down on India’s export sector that is a significant contributor to the country’s economic growth. Moreover, the weird climatic condition that has resulted in a 10 per cent deficit in monsoon rainfall by the end of August this year is expected to pose a new challenge to India’s economy.
In addition to these two factors, tighter financial conditions have led to a rise in the interest rate and cost of capital, and as a result, industrial growth especially manufacturing growth continues to be tepid.
India’s Reserve Bank which is tasked by the government to control the retail prices in the country has been following a tight monetary policy to control the retail prices, measured as the Consumer Price Index (CPI). As per Section 45ZA of the RBI Act, the Reserve Bank is legally mandated to keep the retail prices in the country in the range set by the government which is 4 per cent with a margin of two per cent on either side.
"All these risks will continue to weigh and restrict India’s GDP growth to 6.2 per cent in FY24 which was 7.2 per cent in the last financial year, and the quarterly GDP growth, which came in at 7.8 per cent in the first quarter of the current financial year, is slated to slow down sequentially in the remaining three quarters of FY24,” says Sunil Kumar Sinha, Principal Economist of India Ratings and Research.
While the Reserve Bank of India is expecting the same, it estimates the overall FY24 GDP to come in at a little higher at 6.5 per cent.
Also read: Explained: Despite global headwinds, services, farm sector push growth to 7.8% in Q1
Also read: GDP grows at 7.8 pc in Apr-Jun, India remains fastest growing economy
