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India's Status As Fastest Growing Major Economy to Be Short-Lived, Says Report

Asia's third-largest economy is grappling with persistently high unemployment and inflation.

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India may have recorded strong double-digit economic growth in the last quarter but economists, polled by Reuters, expected the pace to more than halve this quarter and slow further toward the end of the year as interest rates rise.

Among other things, Asia's third-largest economy is grappling with unemployment and inflation, which has been running above the top of the Reserve Bank of India's tolerance band all year and is set to do so for the rest of the year.

Growth this quarter is predicted to slow to an annual 6.2 percent from a median forecast of 15.2 percent in Q2, supported mainly by statistical comparisons with a year ago rather than new momentum, before decelerating further to 4.5 percent in October-December.

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Nirmala Sitharaman Pegs Growth at 7.4 Percent

Finance Minister Nirmala Sitharaman, however, pegged the growth at 7.4 percent in this fiscal year.

"Our own estimates have also shown, based on the developments, that we are definitely at that range... 7.4 (percent) and that level will continue even next year," Moneycontrol quoted Sitharaman as saying, speaking at the FE Best Banks Awards event.

The median expectation for 2022 growth was 7.2 percent, according to an August 2022-26 Reuters poll, but economists said that the solid growth rate masks how rapidly the economy was expected to slow in the coming months.

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"Even as India remains the fastest-growing major economy, domestic consumption will perhaps not be strong enough to drive growth further as unemployment remains high and real wages are at a record low level," Reuters quoted Kunal Kundu, Indian economist at Societe Generale, as saying.

He explained that by supporting growth through investment, the government has only fired on one engine while forgetting about the impetus that domestic consumption provides. This is why India's growth is still below its pre-pandemic trend, he elaborated.

Sitharaman said that the International Monetary Fund (IMF) and the World Bank have projected India's growth to be the fastest for the next two fiscal years, and their estimates are in sync with that of the RBI as well.

Even though the economy has expanded, it has not grown fast enough to accommodate about 12 million people joining the labour force each year.

Meanwhile, the RBI is set to hike its key repo rate by another 60 basis points by the end of March to try to bring inflation within the tolerance limit. That follows three interest rate rises this year totalling 140 basis points, and would take the repo rate to 6 percent by the end of Q1, 2023.

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While the RBI's mandated target band is 2-6 percent, inflation was expected to average 6.9 percent and 6.2 percent this quarter and next, respectively, before falling just below the top end of the range to 5.8 percent in Q1, 2023. It is roughly in line with the bank's projection.

'Premature to Go Easy on Inflation'

"Despite signs of a cool-off in price pressures... it is premature to go easy on the inflation fight, given considerable uncertainties from geopolitical risks and hard landing risks in major economies," Reuters quoted Radhika Rao, senior economist at the Development Bank of Singapore, as saying.

The India economy is also dealing with inflation pressure from a weak rupee, which for months has been trading close to 80 to the US dollar (it fell to a record low of 80.11 vs the US on Monday, 29 August, a level that the RBI has been defending in currency markets by selling dollar reserves).

The latest Reuters poll also showed India's current account deficit swelling to 3.1 percent of the gross domestic product this year. This is the highest in at least a decade, which may put further pressure on the currency.

(With inputs from Moneycontrol and Reuters.)

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