Biznextindia : India Ratings and Research (Ind-Ra) believes that its FY23 Economic Outlook released in the month of January 2022 is unlikely to hold in view of the global geo-political situation arising out of the Russia-Ukraine conflict. Since the duration of Russia-Ukraine conflict continues to be uncertain, Ind-Ra has 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. Ind-Ra expects GDP to grow 7.2% yoy in Scenario 1 and 7.0% yoy in Scenario 2 in FY23, compared to its earlier forecast of 7.6%. However, the size of the Indian economy in FY23 will still be 10.6% and 10.8% lower than the FY23 GDP trend value in Scenario 1 and Scenario 2, respectively.
Consumption demand as measured by private final consumption expenditure (PFCE) has been subdued in FY22, despite sales of select consumer durables showing some signs of revival during the festive season. Although the January 2022 round of Reserve Bank of India’s (RBI) Consumer Confidence Survey shows that Current Situation Index increased marginally on the back of better sentiments with respect to the general economic situation, it continues to be in the pessimistic zone. The Expectations Index, which captures one year ahead outlook, moderated due to the surge in COVID-19 infection cases in January 2022. Household sentiments on non-essential/ discretionary spending continue to be subdued. As the consumer sentiment is likely to witness a further dent due to the Russia-Ukraine conflict leading to rising commodity prices/consumer inflation, Ind-Ra expects PFCE to grow at 8.1% and 8.0% in Scenario 1 and 2, respectively, in FY23, as against its earlier projection of 9.4%.
After PFCE, investment demand as measured by the gross fixed capita formation (GFCF) is the second-largest component (27.1%) of GDP from the demand side. Private capex by large corporates, which has been down and out over the past several years, had shown some promise lately in view of the roll-out of the Production-linked Incentive Scheme and increased manufacturing sector capacity utilisation driven by higher exports. However, Ind-Ra expects the surge in commodity prices and disruptions in global supply chain caused by the Russia-Ukraine conflict to take a toll on their sentiments and there is a likelihood that this capex may get deferred till more clarity emerges with respect to the conflict. Government capex, however, is unlikely to be dented. By scaling up the capex to GDP ratio for FY22 to 2.6% as per revised estimate from the budgeted 2.5 and budgeting the capex at 2.9% of GDP for FY23, the government has been showing its resolve to do the heavy lifting. Ind-Ra therefore believes that the overall GFCF growth will not be impacted much and it will grow at 8.8% both in Scenario 1 and 2 in FY23, 10bp higher than January 2022 forecast.
A 10%yoy increase in petroleum product prices without factoring in currency depreciation is expected to push up Consumer Price Index inflation by 42bp and Wholesale Price Index inflation by 104bp. Similarly, a 10% yoy increase in sunflower oil without factoring in currency depreciation is expected to push Consumer Price Index inflation by 12.6bp and Wholesale Price Index inflation by 2.48bp. Both these events could increase the retail and wholesale inflation by 55bp and 109bp, respectively.
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. Therefore, Ind-Ra estimates retail inflation to average 5.8% and 6.2% in FY23 in Scenario 1 and 2, respectively, as against the agency’s earlier forecast of 4.8%.
Due to a higher import bill for items such as mineral fuels & oils, gems & jewellery, edible oils and fertilisers, Ind-Ra expects the current account deficit to come in at 2.8% of GDP under Scenario 1 and at 3.2% of GDP under Scenario 2 as against its earlier projection of 2.3% of GDP. Ind-Ra’s analysis suggests that a USD5/bbl increase in crude oil prices will translate into a USD6.6 billion increase in current account deficit.
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. Even the RBI has so far resisted the temptation to tighten its monetary policy stance, despite retail inflation being close to its upper tolerance level and/or occasionally breaching it. Although there is a case for a 50bp 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 (the difference between potential and actual output) in the economy.