India’s growth forecast cut amid IMF warning

Amid a grim warning by the International Monetary Fund that the unbridled spike in global energy prices would have a negative impact on India’s economy, a leading US investment bank has trimmed the growth forecast of one of the fastest growing major economies by 50 basis points to 7.9 per cent for the fiscal year 2022-23.

Morgan Stanley raised India’s retail inflation estimate to six per cent, and projected the current account deficits to widen by three per cent of GDP. In a report, the bank pointed out that on-going geopolitical tensions exacerbate external risks and impart a stagflationary impulse to the Indian economy. Despite expecting a cyclical recovery trend to continue, the bank expects it to be softer than the earlier projection.

Speaking during a media roundtable on the Russian invasion of Ukraine and its global impact, the IMF managing director Kristalina Georgieva has said India has been very good at managing its finances but the spike in global energy prices will have a negative impact on the country’s economy.

“Clearly the most significant channel of impact on the Indian economy is energy prices.”

Georgieva said since India fulfills the majority of its energy requirements through imports, the rise in prices is going to affect the economy. She stressed that there are some fiscal spaces to be able to respond to the challenge while adding that countries should focus on protecting their vulnerable populations from rising prices.

IMF’s first deputy managing director Gita Gopinath observed that the war has impacted economies globally, including that of India. She explained the war has had an impact on the purchasing power of Indian households since the country relies largely on energy imports and the prices are going up.

“If you’re looking at headline inflation numbers, inflation in India is close to around six per cent, which is the upper end of the inflation band for the Reserve Bank of India,” Gopinath noted.

“Spiking commodity prices, especially of crude oil, will have a bearing on India’s macros, including the current account deficit and inflation. These would create headwinds to growth. The good part is, the health of the financial sector is on the mend, with better capitalisation, profitability and asset quality,” said Amish Mehta, managing director and CEO of ratings agency Crisil, while predicting a GDP growth of 7.8 per cent in fiscal 2023.

As per Morgan Stanley, India is impacted through three key channels such as higher prices for oil and other commodities; trade, and tighter financial conditions, influencing business/investment sentiment.

“Building in higher oil prices, we trim our F23 GDP growth forecast 50bps, to 7.9 per cent, lift our CPI inflation forecast to six per cent, and expect the current account deficit to widen to a 10-year high of three per cent of GDP.”

India is 85 per cent dependent on imports to meet its oil needs and the recent spurt in international oil prices, which pushed rates to a 14-year high of $140 per barrel before retracting, will result in the country paying more for the commodity. Also, higher prices will result in inflationary pressure, the US bank said.

“The key channel of impact for the economy will be higher cost-push inflation, feeding into broader price pressures, which will weigh on all economic agents- households, business, and government.”

Regarding India’s exposure to macro stability risks, Morgan Stanley said even as macro stability indicators are expected to worsen, lack of domestic imbalances and focus on improving the productivity dynamic will help to mitigate risks. “As such, we do not expect that fiscal or monetary policy will need to tighten disruptively to manage macro stability risks. The risk would stem from a further sustained rise in oil prices, leading to quick deterioration in macro stability and currency volatility,” it said.

Being among the fastest growing large economies with aspirations to enter the $5 trillion economy club soon, India is energy-hungry. As per BP World Energy Outlook 2021, India’s primary energy consumption is expected to more than double by 2050. Major energy disruptions threaten the growth story of India.

— issacjohn@khaleejtimes.com