Last year’s Goods and Services Tax rate cut and income tax reductions likely continued to support household disposable income and demand, helping cushion the impact of rising inflation. But economists expect the recent pickup in private investment to be temporary.
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Risks to the outlook for Asia’s third-largest economy, which imports more than 85% of its oil, have increased as crude prices are above $90 a barrel and may climb higher.
Higher fuel and transport costs could strain household budgets while also raising costs for businesses already hesitant to invest because of uncertainty around the U.S.-Iran war.
FASTEST-GROWING MAJOR ECONOMY
Gross domestic product expanded 7.1% year-on-year in the April-June period, slowing from a better-than-expected 7.8% in the previous quarter, according to the median estimate in an August 17 to 24 Reuters poll of 58 economists.
Forecasts for the data due on August 31 ranged from 6.2% to 8.0%.”We started seeing some sort of a nascent recovery in private investment since the second half of last year but it is yet to become stronger, more durable and more broad-based,” said Sakshi Gupta, principal economist at HDFC Bank.
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“The conflict perhaps made private players a little bit more cautious with their outlook, in terms of their capacity expansion plans in certain sectors.”
“Momentum in consumer demand that we have continued to see in the first quarter shows the pass-through of input cost pressures and elevated oil prices has been limited,” she added.
If the forecast is correct, India would remain the world’s fastest-growing major economy.
Business activity remained strong through the April to June quarter, although momentum eased in June. Companies remained optimistic about output over the next 12 months, but overall confidence slipped to a five-month low as firms pointed to difficult economic conditions and a weaker rupee as key concerns.
The rupee has weakened more than 6% against the dollar this year.
India’s goods and services exports, which rose more than 11% year-on-year during the quarter, likely provided additional support to growth, some economists said.
“Private investment may not pick up much unless there is some certainty on geopolitics because it was also hit by inflation, raw materials and supply chain challenges. Growth would still be led by government capex,” said Madhavankutty G, chief economist at Canara Bank.
Economists in the poll forecast growth to lose momentum in coming quarters. GDP growth was expected to slow to 6.6% this quarter and 6.5% next. It would average 6.7% this fiscal year, in line with Reserve Bank of India projections.
Gross value added, a measure of economic activity that excludes taxes and subsidies, was estimated to have expanded 7.2%, based on a smaller sample of forecasters.
The RBI would keep interest rates unchanged for at least six months, the survey predicted.