Inflation, supply crunch amid Ukraine war dampen India growth projections

The ongoing geopolitical tensions and the subsequent disruptions have caused analysts across the board to lower their projections for Indian economic activity. The optimism around the country’s growth after a milder third wave of Covid-19 infections has been overshadowed by the Russian invasion of Ukraine and the resultant supply bottlenecks and commodity price inflation.

“A slew of institutions have scaled down their forecasts. There is substantial variation in the forecasts. But, independent of this, the scaling down of forecasts is almost uniform across institutions,” notes the Centre for Monitoring Indian Economy (CMIE).

“The GDP growth projections rolled out by various forecasters are spread within a wide range of 5.4% and 9.1%. But there is near-consensus that the war-induced high inflation and rate hikes to tame it are going to dampen India’s economic growth,” the think tank further states.

In April, the International Monetary Fund (IMF) revised its projection for India’s real GDP growth in 2022-23 downwards to 8.2% from 9%, on account of the Russia-Ukraine war. The agency noted that the ongoing war would hurt private consumption and investment, and in turn growth by the way of higher prices. The World Bank also blamed the war for slashing its growth forecast for India’s GDP during fiscal 2023 to 8% from 8.7%.

The Asian Development Bank (ADB) has projected India’s real GDP to grow at 7.5% in 2022-23, lower than the IMF and the World Bank. The development bank also warned of downside risks to the outlook due to uncertainties stemming from the Russia-Ukraine war, rise in Covid-19 infections and monetary tightening by the United States Federal Reserve.

International ratings agencies have called out the impact of the Russia-Ukraine war on the Indian economy even earlier. In its March projection, Moody’s lowered India’s GDP growth prospects for 2022 to 9.1% from 9.5%. In the same month, Fitch Ratings downgraded its 2022-23 growth forecast for India to 8.5% from 10.3%. Notably, this is the steepest revision among analysts, coming from the once most optimistic forecaster.

S&P Global Ratings has also lowered India’s growth projection for the current fiscal year to 7.3% from 7.8% recently. The ratings agency has cautioned that the downside risks to growth outlook had increased with the possibility of the Russia-Ukraine conflict being dragged or escalating further.

Among domestic ratings agencies, ICRA revised India’s GDP growth forecast for 2022-23 downwards to 7.2% from 8%. Meanwhile, Crisil has retained its forecast at 7.8% in its March 2022 review. The agency had argued that there was a potential upside to the growth forecast due to the early end of a mild third wave of Covid-19 infections. However, it is now offset by the ongoing geopolitical conflict.

In its April monetary policy statement, the Reserve Bank of India (RBI) had pegged India’s real GDP growth for the current fiscal at 7.2%. This is a downward revision from its February projection of 7.8% GDP growth.

A survey of professional forecasters by the RBI, comprising 33 economists, saw the median GDP growth projection drop to 7.5% in its 75th round conducted during March 14-31, 2022 from 7.7% in the 74th round conducted during January 12-27, 2022. This is in contrast to the rise in professional forecasters’ confidence in India’s growth prospects since the second Covid-19 wave.

Professional forecasters expect private final consumption expenditure (PFCE) to bear the brunt of the war-induced inflation. Their median projection for PFCE growth in 2022-23 has dropped by 80 basis points to 7.5% since February 2022. The projection for gross fixed capital formation (GFCF) has also come, but at a significantly lesser 10 basis points to 8.8%.

From the supply side, the forecasters expect industry, including manufacturing, mining and utilities, to be the worst hit. Their median forecast for industrial gross value added (GVA) growth has come down by 80 basis points to 6.2%. The growth projection for the services sector has been revised downward by a smaller 10 basis points to 8.4%. That for the agricultural sector remains unchanged at 3.2%.