Inflation, increase in current account deficit and rupee depreciation among concerns
Spiralling commodity and oil prices and concerns emanating from the Russia- Ukraine war present new challenges to growth that was beginning to stutter in the third quarter of 2021-22.Private final consumption expenditure and gross fixed capital formation witnessed moderation on a sequential basisin the December 2021 quarter and these could be further hit due to the war that shows no signs of abating. Economists are already highlighting downside risks to their projections.
“As of now, we maintain our GDP growth forecast for 2021-22 at 8.6 per cent but there are concerns over how the ongoing conflict will impact crude oil prices, inflation, trade deficit and currency,” said Devendra Pant, Chief Economist, India Ratings.
“The immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in current account deficit and rupee depreciation. Ind-Ra’s analysis suggests that a $5/barrel (bbl) increase in crude oil prices will translate into an $6.6 billion increase in trade/current account deficit,” the agency had said in a recent note.
According to the second advance estimates of national income 2021-22, GDP growth is estimated at 8.9 per cent, slightly lower than the first advance estimate of 9.2 per cent largely due to base effect.
The data indicate some pick up in private final consumption expenditure in the third quarter of the fiscal which is estimated to have grown at 7 per cent (year on year) and is expected to expand by 7.6 per cent for the full financial year. However, it has slowed down on a sequential basis.
Most analysts expect GDP growth in the fourth quarter to be lower at sub five per cent and private final consumption expenditure is also estimated to grow at about 1.5 per cent.
Gross fixed capital formation, which is a proxy for investments, too was disappointing with a mere 2 per cent growth in the third quarter of the fiscal and is estimated to grow by 1.3 per cent in the fourth quarter
High frequency data till now indicate a mixed picture. While manufacturing has been strong, consumption in some segments was weak.
IHS Markit India Manufacturing Purchasing Managers’ Index was at 54.9 in February, up from 54 in January while the Services PMI rose marginally to 51.8 last month from 51.5 in January. The mop up from the goods and services tax also remained above Rs. 1.3 lakh crore in January. RBI data shows that non-food bank creditgrew 8.3 per cent year on year in January 2022 as against a 5.9 per cent growth a year ago.
Automobile saleswas hitin February with semiconductor shortage haunting the industry. Top passenger vehicle makers Maruti Suzuki and Hyundai Motor reported a seven percent and 15 per cent drop in domestic wholesalerevenueon a year on year basis respectively in February this year. Two-wheeler sales also remained in the red.
According to PPAC data, fuel consumption in January this year was down at 17.61 million tonne compared to 18.28 million tonne in December 2021 and 17.64 million tonne in January 2021.
TheNomura India Business Resumption Indexmoderated to 120.5 for the week ending March 6 from 122 in the previous week but remains 20.5pp above pre-pandemic levels.
Impact of the ongoing war
There are concerns that soaring global crude and commodity prices could fuel inflation and dampen private consumption further, if the war escalates.
“However, thefourth quarter 2021 GDP growth printcorroborated the view of a weak underlying growth recovery prior to the third wave, which will likely be further exacerbated by theRussia Ukraine conflict, particularly through the inflationary channel. Not only do we estimate that every 10 per cent rise in crude oil prices negativelyaffects GDP growth byabout 0.2 percentage points, but India may also have to contend with higher prices and supply-side constraints for edible oils and fertilisers,” Nomura said in the note, adding that this adds downside risks to its GDP growth outlook (7 per cent year on year in 2022) and upside risks to inflation (5.9 per cent in 2022).