India Ratings slashes India's FY23 GDP forecast to 7%-7.2% from 7.6%

India Ratings, on Wednesday, cut its real gross domestic product (GDP) growth forecast for FY23 to 7-7.2 percent from 7.6 percent seen earlier, on back of higher commodity prices due to Russia’s invasion of Ukraine.

“Since the duration of Russia-Ukraine conflict continues to be uncertain, we have created two scenarios with respect to the FY23 economic outlook basis certain assumptions. In scenario 1, the crude oil price is assumed to be elevated for three months, and in scenario 2, the assumption is for six months, both with a half cost pass-through into the domestic economy,” India Ratings’ (Ind-Ra) Principal Economist Sunil Sinha said in a statement.

He said that in the first scenario, it expects India’s GDP to grow 7.2 percent, and 7.0 percent in the second scenario. Ind-Ra’s India GDP forecast cut comes a day after ICRA Ltd cut its FY23 growth forecast to 7.2 percent from 8 percent.

“We expect the surge in commodity prices and disruptions in global supply chain caused by the Russia-Ukraine conflict to take a toll on corporate sentiments and there is a likelihood that private sector capex may get deferred till more clarity emerges with respect to the conflict. government capex, however, is unlikely to be dented,” Sinha said.

As private sector capex has yet to recover fully due to the pandemic, Finance Minister Nirmala Sitharaman has budgeted a capital expenditure outlay of Rs 7.5 trillion for FY23, including Rs 1 trillion in long term, interest free loan to states for their capex needs.

 

On Tuesday, while replying to the debate on Finance Bill in Rajya Sabha, Sitharaman had that the war between Russia and Ukraine has disrupted supply chains around the world, including in India. “Revival from pandemic is still an ongoing job. We are focusing on growth and recovery with a predictable tax regime. We are facing the situation of a full blown war which is having an impact on all countries. This war is having an impact on supplies, value chains are broken and global markets are caught up in a situation where nothing is normal,” she said.

Oil prices jumped by more than 3 percent on Wednesday on supply tightness and the growing prospect of new Western sanctions against Russia even as Moscow and Kyiv held peace talks, Reuters reported. At home, incremental increases in retail prices of petrol and diesel continue.

Ind-Ra said that a 10 percent y-o-y increase in petroleum product prices without factoring in currency depreciation is expected to push up retail inflation by 42 basis points and wholesale inflation by 104 basis points.

“Retail prices of petrol and diesel were on hold since early-November 2021. However, they have begun to inch up from March 2022 almost on a daily basis. Although the union government acknowledges the adverse impact of the Russia-Ukraine conflict on the ongoing Indian economic recovery, it is unlikely to scale down its fiscal support already announced in the FY23 budget,” Sinha said.

“Although there is a case for a 50 basis points increase in the policy rates in FY23, the RBI may still opt for accommodation, because it believes initiating a premature demand compression via a monetary policy action would be counterproductive, particularly when the recovery is fragile and there is an output gap  in the economy,” he said.