Fitch on Tuesday cut India’s GDP growth forecast for FY23 by 180 basis points to 8.5 per cent on account of high fuel prices. However, it has upped growth rate for the current financial year by 60 basis points to 8.7 per cent. 100 basis points means one per cent.
Global economy
The agency has also lowered projection for global economy. In its latest Global Economic Outlook, it cut its world GDP (Gross Domestic Product) growth forecast for 2022 by 70 basis points. Similarly, it slashed the growth for the Eurozone by 150 basis points and the US by 20 basis points.
“This reflects the drag from higher energy prices and a faster pace of US interest rate hikes than anticipated. We have lowered our forecast for world growth in 2023 by 20 basis points to 2.8 per cent,” the agency said.
India GDP growth
Talking about India, the agency noted that GDP growth was very strong in October–December quarter of the current financial year.
It estimated that GDP rose 6.1 per cent q-o-q (quarter-on-quarter), stronger than previously projected 4.7 per cent growth.
“Indian GDP is more than 6 per cent above its pre-pandemic level, though it is still well below its implied pre-pandemic trend,” the agency said.
According to Fitch, 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.
The PMI index for the services sector showed a slowdown in activity in January and February — well short of an outright decline. Industrial production managed to record a small rise in January, at the height of the Omicron-driven wave.
With the wave subsiding quickly, containment measures have been scaled back, setting the stage for a pick-up in GDP growth momentum in the April-June quarter.
On the macro policy front, the government in February presented new spending plans in the Union Budget largely focused on increasing capital expenditure.
Funds will be disbursed across many areas ranging from transport to energy to irrigation. In the short-term, this will boost aggregate demand. Moreover, bank lending has picked up recently, helped by a relaxation of lending standards, whilst overall financial conditions remain very loose.
“Against this backdrop, we have nudged up our GDP growth forecast for FY 2021-2022 to 8.7 per cent (+0.6 percentage point from the December Global Economic Outlook). However, we have lowered our growth forecast for FY 2022-2023 to 8.5 per cent (-1.8 pp) on sharply higher energy prices,” the agency said.
Inflation issue
“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). We now see inflation strengthening further, peaking above 7 per cent in 3Q22 (July-September), before gradually easing. We expect inflation to remain elevated throughout the forecast horizon, at 6.1 per cent annual average in 2021 and 5 per cent in 2022,” the agency said.
It noted that the monetary policy normalisation has been very shallow to date. RBI has prioritised the economic recovery over tackling inflation amid a still-large output gap.
“We still expect the repo rate to rise to 4.75 per cent by December, from 4 per cent currently. The reverse repo rate — which has become the effective driver of money market rates since the start of the pandemic — is likely to be increased by a larger amount,” the agency said.