Barclays forecasts GDP to grow 7.0% in FY22-23, with robust underlying trend

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India’s economic performance has arguably been better than its peers, as the growth recovery has been robust while inflation has risen by much less than in other economies. So far this year, US benchmark indices are down 10-26%, but India’s Nifty50 is up almost 3%. The US is facing unprecedented inflationary pressures, highest in 4 decades.

Europe is besieged by inflation on one front and an energy crisis on the other. To top it all both, FED and European Central banks are on a rate hiking spree to rein in soaring inflation. As the world looms under strong inflationary headwinds, India’s economy stands out as an outlier, benefiting from enhanced food security, deleveraged private sector balance sheets and more room to use fiscal tools to mitigate the relative price shocks other Asian economies are facing in terms of weaker exchange rates, high inflation and rising interest rates.

India in a sweet spot

Despite an imminent slowdown in Europe, a clearly weaker China and tighter monetary conditions in the US, there are no signs of a likely significant pull-back in economic activity in India. Despite the small contraction in Q2 GDP, India’s economy remains resilient especially taking into account the sharp increase in price pressures through Q2 which were helped by countercyclical fiscal measures in the form of tax cuts and subsidies. Barclays predicts, an annual growth of at least 6.0-6.5% y/y can be generated over the next two years as underlying demand appears strong, as households and corporates are benefiting from countercyclical fiscal tools, such as tax cuts and subsidies. Barclays also forecasts GDP to grow 7.0% in FY22-23, with the underlying trend robust.

Domestic tailwinds

Unlike the West, where consumption, mainly in goods, boomed from 2021 through H1 2022, India has seen a modest recovery in private spending; as an example, passenger-vehicle sales have only just increased beyond pre-COVID levels while two-wheeler sales are still about 150,000 less than Q4 2019’s monthly average of ~1.5mn. While spending is impacted by inflationary pressures, demand for goods, including consumer durables, remains resilient in India.

The recent increase in personal loans, with loans for consumer durables as well as services seeing a solid acceleration through 2022, underscores the strength of consumption demand. The strength of bank balance sheets, high system liquidity, and relatively deleveraged situation of both households and corporates, have supported credit growth.

Word of caution

Strong growth which is set against the backdrop of elevated inflation, large current account deficits and a stretched fiscal position could weaken some indicators of macro stability. Given the elevated commodity prices and the level of fiscal support provided to contain inflation, concerns remain around India’s large current account and budget deficits. These risks to macro stability may increase if growth accelerates too sharply.

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