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India Ratings Slashes India's GDP Forecast To 7%-7.2% Amid Russia-Ukraine War

India Ratings Slashes India's GDP Forecast To 7%-7.2% Amid Russia-Ukraine War

Since the duration of the war continues to be uncertain, in the first scenario crude oil prices could remain elevated for three months, and in the second case for six months.

Icra had also pencilled in a similar rate of growth for the economy.
Icra had also pencilled in a similar rate of growth for the economy.

India Ratings has lowered its GDP growth forecast for FY23 to 7-7.2 per cent, from 7.6 per cent earlier citing the rising uncertainty over the Russia-Ukraine war and the resultant dampening of consumer sentiment.

Since the duration of the war continues to be uncertain, in the first scenario crude oil prices could remain elevated for three months, and in the second case for six months, Ind-Ra said.

If crude prices remain high for three months, FY23 GDP could grow by 7.2 per cent; in case it lasts longer, then growth will be 7 per cent, down from 7.6 per cent projected earlier, its chief economist Devendra Pant and principal economist Sunil Kumar Sinha said on Wednesday.

They said the size of the economy in FY23 will be 10.6 per cent and 10.8 per cent lower than the FY23 GDP trend value in these two scenarios, respectively.

On Tuesday, ICRA had also pencilled in a similar rate of growth for the economy.

Noting that consumer demand, as measured by private final consumption expenditure, has been subdued in FY22, despite sales of select consumer durables showing signs of revival during the festive season, the report doubts the same to pick up or remain where it is now given the rising inflation worries and so is household sentiments on non-essential/discretionary spending which continue to be subdued.

Consumer sentiment is likely to witness a further dent due to the Ukraine war leading to rising commodity prices/consumer inflation.

India Ratings expects private consumption spending to grow at 8.1 per cent and 8 per cent in scenarios 1 and 2, respectively, in FY23, as against its earlier projection of 9.4 per cent.

Similarly, investment demand, as measured by the gross fixed capita formation, is the second-largest component (27.1 per cent) of GDP from the demand side. Private Capex by large corporates, which has been down and out over the past several years, has shown some promise lately in view of the rollout of the production-linked incentive scheme and increased manufacturing sector capacity utilization driven by higher exports.

However, they expect the surge in commodity prices and disruptions in the global supply chain caused by the Ukraine war to take a toll on sentiments and it's likely this Capex may get deferred till more clarity emerges with respect to the conflict.

However, government Capex is unlikely to be dented. By scaling up the Capex to GDP ratio for FY22 to 2.6 per cent, according to the revised estimate from the budgeted 2.5 per cent and budgeting for 2.9 per cent for FY23, the government has been showing its resolve to do the heavy lifting, they said, and believe that the overall gross fixed capital formation growth will not be impacted much and will grow at 8.8 per cent in both the scenarios in FY23, which is 10 basis points (bps) higher than their January forecast.

On the inflation front, they warn that a 10 per cent rise in oil prices without factoring in currency depreciation, is expected to push up retail inflation by 42 bps and wholesale inflation by 104 bps. Similarly, a 10 per cent jump in sunflower oil without factoring in currency depreciation is expected to push retail inflation by 12.6 bps and wholesale inflation by 2.48 bps.

Both these events can increase the retail and wholesale inflation by 55 bps and 109 bps, respectively. Retail fuel prices, which were on hold since early-November 2021, have been inching up since last week on a daily basis and have gone up almost Rs 5 so far. Based on this slow rise they estimate retail inflation to average 5.8 per cent and 6.2 per cent in FY23 in these scenarios, respectively, as against the earlier forecast of 4.8 per cent.

Due to a higher import bill for items such as mineral fuels & oils, gems & jewelry, edible oils and fertilizers, they expect the current account deficit to come in at 2.8 per cent of GDP as against 2.3 per cent projected earlier as it figures out that a $5/barrel increase in crude prices will translate into a $6.6 billion increase in current account deficit. 

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