By Arsh Tushar Mogre
BENGALURU (Reuters) – India likely recorded strong double-digit economic growth last quarter, but economists polled by Reuters expected the pace to more than halve this quarter and slow further towards the end of the year as interest rates they increase.
Asia’s third-largest economy is struggling with persistently high unemployment and inflation, which has been above the top of the Reserve Bank of India’s tolerance zone all year and is set to do so for the rest of 2022.
Growth this quarter is forecast to slow sharply to 6.2% annually from a median forecast of 15.2% in the second quarter, supported mainly by statistical comparisons with a year ago rather than new momentum, before slowing further to 4.5% in October-December.
The median expectation for growth in 2022 was 7.2 percent, according to an Aug. 22-26 Reuters poll, but economists said the steady growth masked how quickly the economy was expected to slow in coming months.
“Even as India remains the fastest growing major economy, domestic consumption may not be strong enough to drive growth further as unemployment remains high and real wages are at a record low,” said Kunal Kundu, Indian Economist at Societe Generale.
“By supporting growth through investment, the government has fired only one engine, forgetting the boost provided by domestic consumption. This is why India’s growth is still below the pre-pandemic trend.”
The economy has not grown fast enough to accommodate the roughly 12 million people joining the workforce each year.
Meanwhile, the RBI, a relative laggard in the global tightening cycle, is set to raise its key repo rate by another 60 basis points by the end of March to try to bring inflation within tolerance. [ECILT/IN]
This follows three rate hikes this year, totaling 140 basis points, and will take the repo rate to 6.00% by the end of the first quarter of 2023.
While the central bank’s mandated target range is 2%-6%, inflation was expected to average 6.9% and 6.2% this quarter and next quarter, respectively, before falling slightly below top of the range at 5.8% in the first quarter of 2023. according to the central bank’s forecast.
“Despite signs of easing price pressures… it is premature to go easy on the inflation battle given significant uncertainty from geopolitical risks and risks of a hard landing in major economies,” said Radhika Rao, senior economist at DBS.
The economy is also under inflationary pressure from a weak rupee, which for months has traded near 80 to the US dollar, a level the central bank defends in foreign exchange markets by selling dollar reserves.
The latest Reuters poll also showed that India’s current account deficit swelled to 3.1 percent of gross domestic product this year, the highest in at least a decade, which may put further pressure on the currency.
(For other stories from Reuters’ Global Long-Term Economic Outlook poll package:)
(Reporting by Arsh Tushar Mogre; Polling by Anant Chandak, Devayani Sathyan and Vivek Mishra; Editing by Hari Kishan, Ross Finley)