India’s rating has lowered its GDP growth forecast for FY23 to 7-7.2 per cent, from 7.6 per cent previously, citing growing uncertainty over the Russia-Ukraine war and consequently weakening consumer sentiment.
As the war period continues to be volatile, in the first scenario, crude oil prices could remain raised for three months, and in the second case, for six months, Ind-Ra said.
If crude oil prices remain high for three months, FY23 GDP could grow by 7.2 percent; if it lasts longer, then growth will be 7 per cent, down from 7.6 per cent previously projected, chief economist Devendra Pant and lead economist Sunil Kumar Sinha said on Wednesday.
They said the size of the economy in FY23 would be 10.6 per cent and 10.8 per cent lower than the trend value of FY23 GDP in these two scenarios, respectively.
On Tuesday, another rating agency ICRA also posted a similar growth rate for the economy.
Recognizing that consumer demand, as measured by private end-consumption spending, had declined in FY22, although sales of selected consumer durable goods showed signs of a revival during the festive season, the report doubts the same will pick up or remain where it is now, given that rising inflation is worrying as well as household sentiment towards insignificant spending/discretionary continued weakening.
Consumer sentiment is likely to see a further deterioration as a result of the Ukraine war leading to rising commodity prices/consumer inflation.
Ind-Ra expects private consumption expenditure to increase by 8.1 per cent and 8 per cent in scenarios 1 and 2, respectively, in FY23, compared to its initial projection of 9.4 per cent.
Similarly, as measured by gross fixed capital formation, investment demand was the second largest component (27.1 per cent) of GDP out of the demand share. Private budgets by large companies, which have declined in and out in recent years, have shown some promise in recent years, as the launch of production-related incentive schemes and increased capacity utilization of the manufacturing sector are driven by higher exports.
However, they expect the surge in commodity prices and disruptions in the global supply chain caused by the Ukraine war will dampen sentiment. This capex will likely be delayed until more clarity emerges about the conflict.
However, government CAPEX is unlikely to be affected. By increasing the CAPEX -to -GDP ratio for FY22 to 2.6 per cent, according to revised estimates from the 2.5 per cent budget and the 2.9 per cent budget for FY23, the government has shown its determination to do the hard work, they said. , and believes that overall gross fixed capital formation growth will not be much affected and will grow at 8.8 per cent in both scenarios in FY23, which is 10 basis points (bps) higher than their January forecast.
In terms of inflation, they warned that a 10 per cent rise in oil prices regardless of currency depreciation is expected to boost retail inflation by 42 basis points and wholesale inflation by 104 basis points. Similarly, a 10 per cent jump in sunflower oil regardless of currency depreciation is expected to drive retail inflation by 12.6 basis points and wholesale inflation by 2.48 basis points.
This event could boost retail and wholesale inflation by 55 basis points and 109 basis points respectively. The retail price of fuel, which has been delayed since early November 2021, has increased since last week and has risen 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 respectively in FY23 in this scenario, compared to the initial forecast of 4.8 per cent.
Due to higher import bills for goods such as mineral fuels and oil, gems & jewelery, edible oils and fertilizers, they expect the current account deficit to increase at 2.8 per cent of GDP from 2.3 per cent previously projected as stated by it. that a $ 5/barrel increase in oil prices would translate into a $ 6.6 billion increase in the current account deficit.