Bombay:
India Ratings has lowered its FY23 GDP growth forecast to 7-7.2 percent from 7.6 percent earlier, citing growing uncertainty over the war between Russia and Ukraine and the resulting dampening of consumer confidence.
Because the duration of the war remains uncertain, crude oil prices could remain high for three months in the first scenario, and six months in the second, Ind-Ra said.
If crude oil prices remain high for three months, GDP could grow 7.2 percent in FY23; if it takes longer, growth will be 7 percent, up from 7.6 percent previously forecast, chief economist Devendra Pant and chief economist Sunil Kumar Sinha said Wednesday.
They said the size of the economy in FY23 will be 10.6 percent and 10.8 percent lower, respectively, than the FY23 GDP trend value in these two scenarios.
On Tuesday, another rating agency ICRA had also signed a similar growth rate for the economy.
The report notes that consumer demand, as measured by private consumption expenditure, was subdued in FY22, despite sales of select consumer durables showing signs of rebounding during the holiday season, the report doubts whether it will pick up or stay the same where it is now, given that rising inflation concerns and so are household feelings about non-essential/discretionary spending, which remain subdued.
Consumer confidence is likely to be further dented as a result of the war in Ukraine leading to rising commodity prices/consumer inflation.
Ind-Ra expects private consumption spending to grow by 8.1 percent and 8 percent in scenarios 1 and 2, respectively, in FY23, compared to an earlier forecast of 9.4 percent.
Similarly, when measured by gross fixed capital formation, investment demand is the second largest component (27.1 percent) of GDP on the demand side. Private Capex by large companies, which has been on a downward trend in recent years, has shown some promise of late, given the roll-out of the production incentive scheme and the increased capacity utilization of the manufacturing sector due to higher exports.
However, they expect that the rise in commodity prices and disruptions in the global supply chain caused by the war in Ukraine will negatively affect sentiment. This Capex is likely to be postponed until more clarity about the conflict emerges.
However, it is unlikely that the government’s CAPEX will be affected. By raising the CAPEX-to-GDP ratio for FY22 to 2.6 percent, according to the revised budget estimate of 2.5 percent and budgeting 2.9 percent for FY23, the government has shown its determination to work, they said. , and believe that overall gross fixed capital formation growth will not be much affected and will grow by 8.8 percent in both scenarios in FY23, which is 10 basis points (bps) higher than their January forecast.
On the inflation front, they warn that a 10 percent increase in oil prices, excluding currency depreciation, is expected to push retail inflation by 42 bps and wholesale inflation by 104 bps. Similarly, a 10 percent increase in sunflower oil excluding currency depreciation is expected to push retail inflation by 12.6 bps and wholesale inflation by 2.48 bps.
These events could increase retail and wholesale inflation by 55 bps and 109 bps, respectively. Retail fuel prices, which have been on hold since early November 2021, have risen since last week and are up nearly Rs 5 so far. Based on this slow rise, they estimate retail inflation at 5.8 percent and 6.2 percent in FY23, respectively, in these scenarios, against the earlier forecast of 4.8 percent.
As a result of higher import bills for items such as mineral fuels and oils, gems and jewelry, edible oils and fertilizers, they expect the current account deficit to reach 2.8 percent of GDP, up from 2.3 percent previously estimated. as the figures show. that a $5 a barrel rise in crude oil prices will translate into a $6.6 billion increase in the current account deficit.