Accounting for base effect, 7.5% GDP growth is more like 4-4.5%, says Citi’s Samiran Chakroborty
Last Updated: Mar 18, 2022, 09:00 AM IST
“Even with 7.5% GDP growth year-over-year it might not feel like we are in a kind of very fast growth phase, it is a modest growth that we are going to achieve. And if global uncertainties increase then there are downside risks to this 7.5% GDP growth as well. We are now looking at a broader global commodity price inflation and its impact on India beyond just simply the oil prices.”
“In my view, the coexistence of this negative output gap and elevated inflation, particularly core inflation, is going to be one of the key challenges for the economy as we move into FY23,” says Samiran Chakraborty, MD & Chief Economist, India, Citi Research.
How difficult is it to assess the impact of this volatility in crude and various other commodities? The balance sheet problem that India may have to face?
These are times when economists also need to be humble and accept that there are certain things which can be done only from a scenario analysis perspective. It is possible for us to quantify part of the uncertainty and give scenarios on what would be the impact on the economy under those scenarios. But it is very difficult to predict which scenario is going to play out. So one can say that if oil is at $80 then how it will look versus if oil is at $100 or $120. But if you ask me whether oil will actually be at $80 or $100, that is almost impossible to predict at this point.
Do you think incrementally over years, the impact of oil and other commodity prices have come down versus what it used to be earlier?
The fact is that we are still importing bulk of our oil. The fact is this is a scenario where in an almost unprecedented fashion, a whole basket of commodities from agricultural commodities to metals, to energy has gone up together because both Russia and Ukraine are major global suppliers of a whole bunch of commodities.
So from that perspective, when we look at the impact on India particularly on inflation, etc, we cannot just restrict ourselves to oil. It goes much beyond that. Yes there are small areas where we exploit the opportunity as well like with global wheat prices increasing, it is possible for India to export more wheat or for that matter in certain metals where the Russia supply could reduce and India could take up that space. But beyond that, we are now looking at a broader global commodity price inflation and its impact on India beyond just simply the oil prices.
FMCG companies have really taken a hit. When you see such hyperinflation and sudden change in the disposable income that any person would have, what sort of an impact does it have on overall consumption in the economy?
It is an interesting situation that we are passing through where we are living almost in a dual economy setup and we often refer to it as a K-shaped recovery where a part of the population who are probably engaged in the formal sector, have pretty decent jobs and income growth are able to tolerate some part of this price increase which is leading to companies having some pricing power. FMCGs have been regularly taking price hikes.
While this set of consumers have the purchasing power which is leading to the pricing power for companies, there is also the downward part of the K, the other part of the dual economy where there is significant stress and that is why we are seeing this very peculiar situation where inflation is elevated at a time when the output gap is negative, when the actual GDP is running much lower than where the potential GDP is.
One would expect inflation to be lower but very oddly, we are seeing both coexist at this moment and that poses all sorts of challenges in front of policy makers. because if they tighten too much, then they worsen this potential versus actual GDP differential and if they do not tighten at all, then inflation could go up even further. In my view, the coexistence of this negative output gap and elevated inflation, particularly core inflation, is going to be one of the key challenges for the economy as we move into FY23.
Just when we talk about growth rates and the preference of emerging markets and India’s weightage over there, can you tell us if India will be one of the fastest growing markets despite the overall cuts that we are seeing globally because of high commodity prices?
When we look at FY23 growth rates, we have to be slightly cautious in interpreting the numbers. We have a view that with around $80-85 per barrel oil prices, India’s GDP growth could be about 7.5% next year and that 7.5 % would be one of the highest in the world but we have to also put the context here that there is a significant base effect from lower growth in FY22, particularly in the first quarter of FY22 when we had the Covid situation and that when we strip this number off the base effect, then this 7.5% GDP growth is more like a 4-4.5% GDP growth which is lower than India’s potential GDP growth.
So even with 7.5% GDP growth year-over-year it might not feel like we are in a kind of very fast growth phase, it is a modest growth that we are going to achieve. And if global uncertainties increase then there are downside risks to this 7.5% GDP growth as well.