Indian economy likely to grow 7.8% in FY23 with risk skewed to the downside: Crisil

The rating agency warned that the ongoing war between Russia and Ukraine and rising commodity prices pose downside risks to growth

The rating agency warned that the ongoing war between Russia and Ukraine and rising commodity prices pose downside risks to growth

India’s economy is expected to grow 7.8% in 2022-23, mainly due to the government’s efforts to boost infrastructure spending and a likely surge in private investment spending, rating agency Crisil said on Thursday .

However, the rating agency warned that the ongoing war between Russia and Ukraine and rising commodity prices pose downside risks to growth.

The country is expected to register a growth rate of 8.9% in the current fiscal year ending March 31.

“Any potential upside from the early end of a mild third wave of COVID-19 infections will be nullified by the ongoing geopolitical unrest over the Russian invasion of Ukraine, which is having a dampening effect on global growth and pushing oil and commodity prices into drive up . Risks to growth are also skewed to the downside,” it said.

Private consumption remains the weak link due to less direct fiscal support, Crisil chief economist Dharmakirti Joshi said at the launch of India Outlook, Fiscal 2023.

As for average CPI-based inflation, he said it will remain firm at 5.4 percent in the next fiscal year — when crude prices average $85-90/barrel — and factor in the consumption tax cuts announced last year .

However, upside risks will build if the geopolitical strife prolongs and oil and commodity prices remain elevated for longer.

Interestingly, inflation was in double digits when crude oil prices averaged $110/barrel between fiscal years 2012 and 2014. Due to relatively cheap domestic food grain prices after lush agricultural production and comparatively lower core inflation, this situation is unlikely to repeat itself this time.

During that time, he said, food and core inflation, which together account for 86% of the CPI, averaged 9.8% and 8.6%, respectively.

“We believe that fiscal policy must be used more aggressively than envisaged in the Union’s budget for next financial year. This can be done by increasing appropriations for job-creating programs and food subsidies, and reducing tariffs on petroleum products,” Joshi said.

This can be a relief bridge for those hardest hit by the pandemic until the virtuous cycle of investment-led growth in the labor market plays out and private consumption demand becomes self-sustaining, he noted.

Higher crude oil prices will widen India’s current account deficit to 2.2% in fiscal 2023, the report said, adding that a US$10 increase in crude oil prices would typically widen the current account deficit to GDP ratio by about 40 basis points elevated.

The near-term impact of high oil prices on inflation will be more pronounced than on growth assuming significant pass-through, it said, adding that all bets are off if oil prices stay at or above $100/bbl for an extended period.

The ripple effects of higher commodity prices have been heavily reflected in India Inc’s operating profitability over the past few cycles.

Passthroughs have been good this time, so we expect the earnings before interest, taxes, depreciation and amortization (Ebitda) margin for the 700 largest companies (excluding oil and banking, financial services and insurance, or BFSI) to exceed this tax, according to the report.

The recovery next fiscal year will be broad-based and supported by a normalization in volumes if geopolitical and other unforeseen events do not pose significant challenges, it said.

“Across all consumption segments, recovery curves have been staggered and income sentiment will be the main driver. As of today, we expect India Inc to post revenue growth of 10 to 14 percent in the next fiscal year,” the report added.

Whilst utilization in legacy sectors does not support a rounded capital recovery, spending under schemes such as Production Linked Incentive (PLI) may see industrial investment grow to over Rs.4-4.5 crore on average in the medium term (to FY2026). compared to Rs 3-3.5 lakh crore in the three years to fiscal 2020.

India’s investment focus is now shifting towards green capital spending with expected spending in excess of 2.85 billion, it said.

This will further help spur a supply-side recovery in the economy as a whole, she added.

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