Crédito y Caución (Atradius) | In India, GDP growth slowed to 7.0% in 2022, down from 8.3% in 2021. In 2023, GDP growth is likely to slow even further to 4.4%, owing to a rapidly weakening global backdrop and slackening domestic demand. There is widespread weakness in the manufacturing industry. Industrial production fell month-on-month on a seasonally adjusted basis in July and August. These trends, in combination with a manufacturing capacity utilisation rate well below 80%, support the view that private investment growth remains lacklustre.
Inflation remains elevated. Headline inflation eased from 7.4% year-on-year in September to 6.8% in October. Fuel inflation and core inflation (CPI excluding food and all fuel) were broadly unchanged. Inflation is forecast to average 6.9% in 2022 before slowing to 5.5% in 2023. We expect consumers to turn more cautious amid tightened monetary policy and elevated price pressures. High inflation weighs on real income growth and is likely to drag down consumption growth in 2023. Both exports and imports show weak dynamics. Falling commodity prices and weaker domestic demand are likely to limit imports in the coming months.
However, exports are likely to fare worse amid recessions in advanced economies and push the current account deficit to 3.5% of GDP in 2022. Alongside a hawkish US monetary policy, this is likely to keep the Indian rupee under pressure against the US dollar into 2023. However, as India has a significant build-up of FX reserves, this is not forecast to jeopardise India’s external position. In response to inflation, the Reserve Bank of India (RBI) hiked the policy rate several times in 2022, but with global supply bottlenecks easing and domestic inflation expectations stabilizing, the case for continued aggressive tightening has lost ground.
We therefore expect no further rate hikes in 2023. The government’s fiscal deficit remains relatively high in the near term (7.2% in 2023). This has raised concerns over debt sustainability as the general government debt is nearing 90% of GDP. If nominal GDP growth were to decline persistently, the debt trajectory is no longer sustainable.