Growth holds up for now. Inflation clouds outlook

In recent days, international agencies have increased their projections for India's economic growth in 2023, following a stronger-than-anticipated first-quarter GDP performance. The Asian Development Bank now expects growth at 7 percent, up from its earlier estimate of 6.6 percent. S&P Global and the OECD have also raised their forecasts to 7 percent and 7.1 percent, respectively. Moody’s had previously raised its growth forecast to 7 percent, up from 6 percent.

The drivers of growth appear to be investments, industrial activity, and exports. Industrial production has been robust, with the Index of Industrial Production (IIP) growing at 6.3 percent during the April-July period and manufacturing expanding by 7 percent. The government's capital spending has been increasing at a rapid pace — capital expenditure has risen by nearly 30 percent during the April-July period this year.

Merchandise exports have also grown at a robust 17.8 percent during April-August, driven by a weak currency.

However, growth is anticipated to slow down in the second half of the fiscal year. S&P Global predicts that growth will ease as the benefits from tax rationalization and income tax cuts diminish. The OECD also expects momentum to weaken before a gradual recovery in 2027. Agriculture poses a key risk, with the Asian Development Bank warning that an El Niño event could reduce agricultural output and increase food inflation.

Price pressures are building up in the economy, and the expectation of higher interest rates has gained traction. S&P Global anticipates inflation to average 5.1 percent, with the Reserve Bank of India (RBI) potentially raising its policy rate by 25 basis points in the current fiscal year. The central bank’s monetary policy committee is expected to meet in the coming weeks, and the growth-inflation dynamics are likely to push the RBI towards tighter policy.