Russia-Ukraine war to weigh on India’s growth – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/india/russia-ukraine-war-to-weigh-on-indias-growth/articleshow/90040493.cms

Synopsis

While retail inflation can be checked through a cut in excise duty on oil, it will disturb the government’s budget. Reduced revenues will swell the fiscal deficit if spending is not cut. Alternatively, if the government decides to stay with the fiscal deficit target of 6.4% of GDP for FY23, capital spending is likely to be reduced, which would in turn depress growth.

Supply disruptions and trade shocks emanating from the Russia-Ukraine conflict, a possible sharp rise in inflation in the next 6-8 months, fiscal pressures and a widened current account deficit (CAD) will weigh on India’s growth in the next financial year.

Growth is expected to be less than 8% in FY23, economists said as they pitched for a cut in excise duties on oil to cushion the impact on inflation. The Economic Survey had forecast 8-8.5% growth in FY23 at the end of January, days after the International Monetary Fund (IMF) had pegged India’s gross domestic product (GDP) growth for the year at 7.1%.

Oil prices have hit their highest levels in almost a decade.

HDFC Bank expects FY23 CAD at 2.3% and has lowered its FY23 growth forecast to 7.9% from 8.2% projected earlier.

India’s CAD was 1.3% of GDP in the September quarter against a current account surplus of 0.9% in the trailing quarter. The government will release third-quarter numbers by the end of this month.

“Our estimate is that every $10 increase in the average price of crude oil in FY23 will widen the CAD by $14-15 billion,” said Aditi Nayar, chief economist at ICRA.

Others also see key indicators getting impacted.

Russia Ukraine war to impact india growth

‘Potential Cut in Taxes’
“Overall, despite India’s limited direct exposure, the combination of supply disruptions and the ongoing terms of trade shock will likely weigh on growth, but also result in a sharper rise in inflation, a wider current account deficit and a hit to fiscal finances due to higher fertiliser subsidies and a potential cut in taxes to shield consumers,” Nomura said in a report released on March 4.

While retail inflation can be checked through a cut in excise duty on oil, it will disturb the government’s budget. Reduced revenues will swell the fiscal deficit if spending is not cut. Alternatively, if the government decides to stay with the fiscal deficit target of 6.4% of GDP for FY23, capital spending is likely to be reduced, which would in turn depress growth.

Higher interest rates to dampen inflationary pressures will also weigh on growth.

“We can’t rule out a contraction in manufacturing,” said Nayar, adding that GDP and gross value added in the fourth quarter of FY22 growth could be in the 2.5-3.5% range.

India’s economy grew by a slower-than-expected 5.4% in the December quarter, pushing down the full-year estimate for FY22 to 8.9% from 9.2% previously.

The government has proposed capital expenditure of Rs 7.5 lakh crore in FY23 compared with Rs 6 lakh crore in the current fiscal year to support growth.

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