India\u2019s rapidly growing economy is facing a number of risks in coming months that\u2019s prompting economists to downgrade their forecasts and call for interest-rate cuts.<\/p>\n
Official data on Friday will likely show growth moderated last quarter from near-8 per cent pace previously, largely due to a slowdown in government spending before the elections. Recent indicators show consumer sentiment is waning and rural spending still hasn\u2019t recovered to pre-Covid levels. A looming slowdown in the global economy is another major risk to the outlook.<\/p>\n
Goldman Sachs Group Inc. has already trimmed India\u2019s growth forecast for the current calendar year by 20 basis points to 6.7 per cent, while Bloomberg Economics lowered its projection for the fiscal year through March 2025 to 6.8 per cent from 7.2 per cent. \u00a0<\/p>\n
That\u2019s putting pressure on the Reserve Bank of India to begin cutting interest rates after staying on hold for more than 18 months. The central bank has been reluctant to pull the trigger because of inflation risks, which are dominated by high food prices.\u00a0<\/p>\n
Gross domestic product likely grew 6.8 per cent last quarter from a year earlier, a Bloomberg survey of economists shows. That would be the slowest pace in five quarters and lower than the central bank\u2019s projection of 7.1 per cent for the period. The economy grew 7.8 per cent the January-March quarter.<\/p>\n
The government is scheduled to release the data at 5:30 p.m. local time on Friday. Here\u2019s a look at some of the key issues that could affect the figures:<\/p>\n
Consumer spending remains subdued<\/b><\/p>\n
Businesses continue to hold back on investment, while consumer sentiment fell for a second consecutive month in July, curbing the outlook for private consumption, which makes up nearly 60 per cent of India\u2019s GDP.\u00a0<\/p>\n
Spending in rural areas, where about 65 per cent of India\u2019s population live, remains subdued, with a Citigroup Inc. index that tracks rural consumption showing spending hasn\u2019t yet reached pre-Covid levels.<\/p>\n
Business profits are taking a knock, which means lower investment and growth going forward.<\/p>\n
There is a \u201crisk that corporate sector profitability remains muted even in subsequent quarters, led by higher input costs and a reduction in demand,\u201d Kaushik Das, an economist at Deutsche Bank AG, wrote in a note. If that were to happen, growth could be lower than the central bank\u2019s forecast of more than 7 per cent expansion in each quarter of the current fiscal year, he wrote.<\/p>\n
Government investment slows before election<\/b>\u00a0<\/p>\n
India\u2019s government curbed investment and construction in the run-up to the elections, which ran for more than six weeks until June 1. The vote saw Prime Minister Narendra Modi returning to office on promises of boosting the economy, although his party lost its outright majority in the lower house of the parliament.<\/p>\n
The government spent 16.3 per cent of its budgeted capital spending in the first quarter of the fiscal year, compared with 27.8 per cent for the same period in the previous year.\u00a0<\/p>\n
What Bloomberg Economics says\u00a0<\/b><\/p>\n
Looking ahead, we see the economy picking up in 3Q24 on stronger public spending now the national elections are out of the way. Another plus \u2014 lower bond yields are reducing borrowing costs for bigger firms.<\/p>\n
But the RBI\u2019s tight stance risks a deeper slump that may be harder to reverse \u2014 particularly in an industrial sector that faces low pricing power and restrictive real rates.<\/p>\n
GDP distortion from tax category should ease<\/b><\/p>\n
India\u2019s growth of 8.4 per cent and 7.8 per cent in the previous two quarters was partly distorted by the net indirect tax category used to calculate GDP. An alternate measure of growth \u2014 gross value added, or GVA, which strips out that distortion \u2014 showed more moderate expansion of close to 6 per cent.<\/p>\n
Economists say the divergence between GDP and GVA won\u2019t be as evident in Friday\u2019s data. \u00a0<\/p>\n
Teresa John, an economist at Nirmal Bang Institutional Equities, estimates a gap of 20-25 basis points this year, compared to 93 basis points last year. A Bloomberg survey of economists expects GVA grew 6.4 per cent in the April-June period from a year earlier.<\/p>\n
Agriculture benefiting from better rainfall<\/b><\/p>\n
Surplus monsoon rains, which irrigate half of the nation\u2019s farmland, will likely provide some relief for the agriculture sector and aid rural India. A recovery in rural areas will boost incomes while also bringing down food inflation in coming months, Sameer Narang, an economist from ICICI Bank Ltd. said.\u00a0<\/p>\n
More stories like this are available on bloomberg.com<\/a><\/p>\n