India has been experiencing one of the most crucial growth phases as an economy with one of the highest gdp growth across the globe. It has become the second most emerging economy in the world as well. Having said that, recently, S&P Global has cut the gdp growth rate forecast for India for the upcoming two fiscals. S&P cut the FY26 forecast to 6.7% and FY27 forecast to 6.8% down by 20 basis points. This has come as a blow to the economy and its people. Let us understand why the gdp growth rate has decreased for the economy for FY26 and FY27.
Why did S&P slash the GDP Growth Rates?
S&P Global Ratings has downgraded India’s growth forecast for the upcoming two fiscal years due to high interest rates in the economy and with the rising inflation, the interest rate cuts seem distant as of now. In addition, lower fiscal impulse has been affecting the urban demand massively, which is taking a toll on the growth of the economy. For this financial year, FY25, the rating house has retained the 6.8% growth rate for the same reasons.
Though the Purchasing Manager Indices (PMIs) are positive but are concentrated in the expansion zones. Growth momentum can slow down in core sectors like construction and related sectors in this quarter as indicated by S&P Global. However, they have also added that this slowdown will be transitory. However, it is not only the rating agency but RBI also commented that the growth of the economy has slowed down in the September quarter and also in the current quarter.
However, in this quarter, given the festivals-driven private consumption increase has made a bit of difference compared to the sluggish September quarter.
How RBI, IMF, and World Bank are seeing India’s growth outlook?
RBI predicted a growth of around 7.1% in the April-June quarter while the actual growth recorded for the period was 6.7%. The data for the July-September quarter will be released this week on Friday, which is eagerly awaited by all.
RBI has kept its hopes high with a 7.2% growth prediction for the FY25 while IMF and World Bank both think that the economy will grow at 7% in this fiscal. Contrary to S&P Global, most of the other independent domestic and global ratings agencies have revised India’s gdp growth rate upwards.
Having said that, the economic survey presented earlier this year also forecasted the real gdp growth to be within the range of 6.5% to 7% for this fiscal. Real GDP growth refers to economic growth, which is already adjusted for inflation.
Inflation and Growth Rate
In FY24 the economy grew impressively at 8.2% however, as the inflation spikes again this year since September, the growth has become sluggish. Food inflation has been the main culprit behind this slowdown, which is also the main reason for the delay in the rate cuts by RBI.
S&P Global Ratings forecasted only one rate cut in this fiscal year but that is also in a dilemma as the inflation rises again. Now inflation has been rising especially consumer inflation due to lower supply in the agricultural sector, which has shot up the food prices. Severe climatic conditions are behind the agricultural slowdown in the country. Food inflation thus has become the most challenging factor for RBI when it is considering any rate cuts.
Wrapping up
In October, consumer inflation soared up to 6.21% even breaching the RBI’s tolerable limit of 6%. Until now, the central bank has kept the repo rate unchanged; however, if inflation cannot be tamed immediately, then it can put immense pressure on the entire economy.
Source: TheEconomicsTimes
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