Sunday, May 22, 2022

Hyper inflation: Fitch slashes India’s FY’23 growth forecast to 8.5%

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New Delhi: Rating agency Fitch on Tuesday slashed India's growth forecast for the next fiscal to 8.5 percent from 10.3 percent, citing soaring energy prices and rising inflation on account of the Russia-Ukraine war. It has revised upwards the GDP growth forecast for the current fiscal by 0.6 percentage points to 8.7 percent. ''However, we have lowered our growth forecast for FY 2022-2023 to 8.5 percent (-1.8 pp) on sharply higher energy prices,'' Fitch said.

For 2023-24, it is estimated at 7 percent. In its Global economic Outlook-March 2022, Fitch said the post-COVID-19 pandemic recovery is being hit by a potentially huge global supply shock that will reduce growth and push up inflation. ''The war in Ukraine and economic sanctions on Russia have put global energy supplies at risk. Sanctions seem unlikely to be rescinded any time soon,'' the agency said.

Last week, another global rating agency Moody's had slashed India's growth estimate for the 2022 calendar year to 9.1 percent from 9.5 percent earlier, saying high fuel and fertiliser import bill could limit capital expenditure.

Russia supplies around 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 add to industry costs and reduce consumers' real incomes…Higher energy prices are a given,'' Fitch said as it has reduced the world GDP growth forecast by 0.7 percentage points to 3.5 percent. International oil prices started rising this year and jumped to a 13-year high of USD 140 per barrel earlier this month as an aftermath of the Russia-Ukraine war. Brent was trading at USD 118.59 per barrel on Tuesday.

India relies on overseas purchases to meet about 85 percent of its oil requirement, making it one of the most vulnerable in Asia to higher oil prices.

Observing that Indian GDP growth was very strong in the December quarter, Fitch said the GDP is more than 6 per cent above its pre-pandemic level though it is still well below its implied pre-pandemic trend. ''High-frequency data indicate that the Indian economy has ridden out the Omicron wave with little damage – in stark contrast with the two previous coronavirus waves in 2020 and 2021,'' it said.

Fitch now sees inflation strengthening further, peaking above 7 percent in the December quarter of 2022, before gradually easing. The agency expects inflation to remain elevated throughout the forecast horizon at 6.1 percent annual average in 2021 and 5 percent in 2022. ''Local fuel prices have been flat over the past weeks, but we assume that oil companies will eventually pass on higher oil prices to retail fuel prices (with some offset from a reduction in the excise duty by the government),'' it added.

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