Fitch raises India's GDP forecast for next fiscal to 7%

Fitch Ratings on Thursday raised its forecast for India's economic growth to 7% for the next fiscal year starting April 1 on the back of strong domestic demand and sustained level of business and consumer confidence.

With a stronger-than-expected 8.4% growth in gross domestic product (GDP) during the third quarter (October-December) of the current fiscal year, Fitch saw the Indian economy expanding 7.8% in 2023-24 financial year (April 2023 to March 2024), marginally higher than the government's estimate of 7.6%.

In its latest 'Global Economic Outlook', the rating agency said the country's economic growth continued to outperform quarterly forecasts with domestic demand (investment growth increased 10.6% year-on-year while private consumption was 3.5% higher).

For the world, Fitch Ratings has raised its 2024 global GDP growth forecast by 0.3 percentage points to 2.4%, as near-term world growth prospects have improved.

This on back of a sharp upward revision to its US forecast to 2.1%, from 1.2% in the December 2023 Global Economic Outlook (GEO).

"Stronger US growth prospects outweigh a marginal cut to our China 2024 growth forecast--to 4.5% from 4.6%--and a minor revision to our eurozone forecast, to 0.6% from 0.7%" it said. 

"Growth in emerging markets, excluding China, has been revised up by 0.1 percentage point to 3.2%, with forecasts raised for India, Russia, and Brazil."

It expected world growth in 2025 to edge up to 2.5% as the eurozone finally recovers--on a pick-up in real wages and consumption--but as US growth slows.

For India, Fitch Ratings said, "With GDP growth having exceeded 8% for three consecutive quarters, we expect an easing in growth momentum in the final quarter of the current fiscal year, implying an estimate of 7.8% for growth in FY24."

Recent quarterly data has shown that GDP is rising much faster than gross value-added--indirect taxes net of subsidies is the difference between the two--and this unusually wide gap may normalise.

Strong business survey data for January and February represents an upside risk to these estimates, it said.

"We expect the Indian economy to continue its strong expansion, with real GDP forecast to increase 7% in FY25, a 0.5 percentage point upward revision from our December forecasts," Fitch Ratings said. 

"Domestic demand, especially investment, will be the main driver of growth, amid sustained levels of business and consumer confidence." 

Its forecasts imply that growth in the short term will outpace the economy's estimated potential, and that the pace of growth of activity will then moderate towards trend in FY25, with real GDP rising 6.5%. It said consumer price inflation picked up in the last months of 2023, driven by food prices. CPI inflation reached 5.7% year-on-year in December, before falling to 5.1% in February. 

Core inflation measures are steadily declining, underlining that developments in food prices (which account for around half of India's consumer price index) will be key to inflation developments and the pace at which inflation will approach the Reserve Bank of India's (RBI) 4% mid-point of its 2%-6% target band.

"We expect headline inflation to steadily decrease to 4% by calendar year-end on the assumption that recent food price volatility will subside," it said.

The RBI has kept its key policy rate at 6.5%, and in its communication has focused on confirming its hawkish policy stance of "withdrawal of monetary accommodation" and the need to bring inflation down towards target.

"We now think that the RBI will cut rates only in the second half of 2024, by 50 basis points (revised from 75 basis points in December) in view of the stronger growth outlook," it added.