Rating agency Fitch lowered India’s growth forecast for the next fiscal year from 10.3 percent to 8.5 percent on Tuesday, citing sharply high energy prices due to the war between Russia and Ukraine.
With the Omicron wave waning rapidly, containment measures have been scaled back, paving the way for a pick-up in GDP growth momentum in the June quarter of this year, the agency said. It has revised its GDP growth forecast for the current fiscal year upwards by 0.6 percentage points to 8.7 percent.
“However, we have reduced our growth forecast for fiscal year 2022-2023 to 8.5 percent (-1.8 pp) at sharply higher energy prices,” Fitch said, adjusting his inflation forecasts. In his March 2022 Global Economic Outlook, Fitch said the pandemic’s recovery from the Covid-19 pandemic will be hit by a potentially massive global supply shock that will reduce growth and push inflation up. “The war in Ukraine and economic sanctions against Russia have endangered global energy supplies. It seems unlikely that sanctions will be lifted any time soon,” the agency said.
Russia supplies about 10 percent of the world’s energy, including 17 percent of its natural gas and 12 percent of oil.
“The jump in oil and gas prices will drive up industry costs and lower real consumer incomes… Higher energy prices are a given,” Fitch said when reviewing the forecast of global GDP growth by 0, 7 percentage points decreased to 3.5 percent.
The agency noted that Indian GDP growth was very strong in the December quarter and said GDP is more than 6 percent above pre-pandemic levels, although it is still well below the implied pre-pandemic trend.
“High-frequency data indicates that the Indian economy weathered the Omicron wave with little damage – in stark contrast to the two previous coronavirus waves in 2020 and 2021,” it said.
Fitch now sees inflation rising further, peaking at more than 7 percent in the December quarter of 2022, before gradually slowing down.
The agency expects inflation to remain high throughout the forecast horizon, with an annual average of 6.1 percent in 2021 and 5 percent in 2022.
“Local fuel prices have been flat in recent weeks, but we assume oil companies will eventually pass higher oil prices on to retail fuel prices (with some compensation through a government cut in excise duties),” it added.