Moody's ups India's FY23 growth forecast to 8.4%; Fitch maintains 10.3%

Moody’s Investors Service on Thursday upgraded its financial year 2022-2023 (FY23) growth forecast for the Indian economy to 8.4 per cent from the earlier estimated 7.9 per cent as the country moves to normalcy, post the removal Covid-19 restrictions. However, it cautioned that high oil prices and supply distortions could drag the growth down.

Fitch Ratings, on the other hand, maintained its earlier projection of 10.3 percent growth in FY23 compared to 8.4 percent estimated for FY22. Moody’s has estimated the Indian economy to grow at 9.3 percent in FY22, official data for which will be released on Monday. “Fiscal push for infrastructure spending could help consolidate India's economic recovery. We have raised our 2022 calendar year (CY22) growth forecasts for India to 9.5% from 7%, and maintained our forecast for 5.5% growth in 2023 (CY23). This translates into 8.4% and 6.5% in fiscal years 2022-23 and 2023-24, respectively,” Moody’s said in its latest Global Macro Outlook.

Moody’s said the speed of the recovery from the first lockdown-led contraction in Q2 2020, and subsequently in Q2 2021 during the Delta wave, was stronger than expected, and the economy is estimated to have surpassed the pre-Covid-19 level of gross domestic product (GDP) by more than 5 per cent in the last quarter of 2021.

“Sales tax collection, retail activity and PMIs suggest solid momentum. As is the case in many other countries, the recovery is lagging in contact-intensive services sectors, but it should pick up as the Omicron wave subsides. With most remaining restrictions now being lifted with the improvement in the Covid-19 situation, including the reopening of schools and colleges for in-person instruction across various states, the country is on its way to normalcy,” it added.

The rating agency said there is an upside potential to the growth rate in FY23 as it assumes relatively restrained sequential growth rates. “We estimate the carry-over from a strong finish to 2021 will add 6%-7% to this year’s annual growth. The 2022 Union Budget prioritises growth, with a 36 per cent increase in allocation to capital expenditure to 2.9 per cent of the GDP for fiscal year 2022-23, which the government hopes will crowd in private investment. With the RBI (Reserve Bank of India) leaving interest rates unchanged at its February meeting, monetary policy remains supportive,” it said.

Fitch said India’s economy is rapidly recovering from the Covid-19 pandemic and financial-sector pressure appears to be easing. “However, the Negative Outlook on the sovereign’s ‘BBB-’ rating reflects lingering uncertainty over the medium-term debt trajectory, particularly in light of India's limited fiscal headroom relative to rating peers,” it cautioned.

The rating agency said the banking sector’s near-term financial performance is likely to improve gradually amid the economic momentum and regulatory forbearance on pandemic-led stress. “Private banks will lead the recovery with faster loan growth than state banks, which may find it difficult to remain competitive without adequate growth capital,” it said.

Fitch expects India’s medium-term GDP growth to remain strong, averaging about 7 percent between FY24 and FY27. “This outlook is underpinned by the closing of the negative output gap, a supportive demographic structure, and the government’s infrastructure drive and reform agenda. However, headwinds remain. Pressure on household incomes, especially in rural areas, could constrain consumption after the rebound that was fuelled by pent-up demand fades. There has also been some slippage on reform momentum,” it added.