India's growth cycle may have already peaked, Nomura economists have said, even as the government has expressed confidence that the latest GDP numbers showed the economic recovery was gaining momentum.
"We believe India's growth rate cycle has peaked and a broad-based slowdown is underway," Nomura economists Sonal Varma and Aurodeep Nandi said in a note on November 30.
"While lower inflation should help support private consumption in coming months, the lagged effects of tighter financial conditions and weak global demand will weigh on both investment and exports, while the post pandemic catch-up in services is largely complete," they added.
Varma and Nandi's comments come after data released by the statistics ministry showed India's GDP growth fell to 6.3 percent in July-September from 13.5 percent in April-June, largely due to the fading away of a favourable base effect.
Speaking to reporters after the release of the data, Chief Economic Adviser V Anantha Nageswaran said on November 30 the economy's performance in July-September showed it had maintained its momentum and the country is on track to grow by 6.8-7 percent in FY23 and build on its growth recovery further in FY24 as well.
However, according to Nomura, the underlying details of the latest GDP data is a "mixed bag" and expects India's growth to fall to 5.2 percent in FY24 from around 7 percent in the current financial year.
"The Q3 (July-September) GDP reading suggests that tailwinds such as a post-pandemic catch-up in the services sector, and the lagged impact of easy financial conditions are now fading," Nomura said, adding that its Nomura India Normalisation Index was showing a broad-based slowdown has been taking place since the peak in April-June.
Further, Nomura's consumption tracker fell from around 11 percentage points above its pre-pandemic level in April-June to around 5 percentage points in July-September. In October, it declined even more to just below its pre-pandemic level.
"As we had highlighted previously, despite anecdotal evidence of bumper festive season sales, consumption remains worryingly K-shaped, rural wage growth remains largely subdued, and consumer sentiments below pre-pandemic levels. The external sector too has entered tumultuous times, as evidenced by the slump in export (and import) growth in October," Varma and Nandi argued.
In October, India's merchandise exports contracted by 17 percent year-on-year to $29.78 billion. This was the first time since February 2021 that monthly exports had fallen on a year-on-year basis and come in below $30 billion.
Sagging exports is a sign of external weakness and Nomura said its base case of developed countries experiencing recession in 2023 is now playing out. The global weakness will harden in the first half of 2023 and "play an outsized role in driving a domestic slowdown in the coming quarters".
The impact on India may be felt in ways more than one. While exports will suffer, Nomura expect investments may also be at risk as "capex cycle has historically been in sync with the global cycle".
Further, the Reserve Bank of India's (RBI) rate hikes will also weigh on growth.
Nomura expects the Monetary Policy Committee (MPC) to increase the repo rate by 35 basis points on December 7 and by 25 basis points on February 8, although the latter rate hike is a "closer call". So far in 2022, the MPC has raised the repo rate by 190 basis point to 5.9 percent.
One basis point is one-hundredth of a percentage point.