Domestic rating agency Crisil on Friday lowered India’s real gross domestic product (GDP) growth forecast to 7.3% from 7.8% estimated earlier, citing higher oil prices, slowing global demand for the country’s exports, and higher inflation. The GDP predictions are in line with the Reserve Bank of India (RBI’s) estimates, which projected the economy to grow at 7.2% for FY23, from earlier guidance of 7.8%.

The report says higher inflation reduces purchasing power and would weigh on the revival of consumption, the largest component of GDP, which has been backsliding for a while. However, a normal monsoon forecast and rebound in contact-intensive services are expected to support the economy.

“The seemingly unending Russia-Ukraine war has wreaked havoc in commodity markets. While freight costs have moderated of late, they are still elevated when compared with the beginning of this year (pre-war). This seems to suggest that a continuing war will prevent any meaningful correction. For India, this translates to higher import bills and higher inflation. At the same time, global growth projections have been lowered, signalling a drag on India’s exports,” the agency says in its report.

Normal monsoon, rise in tax collection only bright spots

A revival in private consumption, the largest demand-side driver, remains weak, while investments have shown some pickup, says the report. “The only bright spots are the uptick in contact-intensive services and forecast of a normal and well-distributed monsoon,” it adds.

It also highlights the latest tax collection data is encouraging and points to continued economic recovery. The finance ministry says the gross and net tax revenues were up 40% and 45% on-year, respectively, as of mid-June 2022. Similar buoyancy is visible in Goods and Services Tax (GST) collections, which rose 30% on- year during April-May 2022.

CPI inflation seen rising to 6.8%

Crisil has pegged the consumer price index (CPI), or retail inflation, could surge to 6.8% on average this fiscal, compared with 5.5% last year. The impact of this year’s heatwave on domestic food production, coupled with persisting high international commodity prices and input costs, will cause a broad-based rise, says the report.

As per the World Bank’s latest commodity outlook, energy prices are projected to rise over 50% this year, and non-energy by around 20%. Crude oil, of which India is a major importer, is expected to average $105-110 per barrel this fiscal, up 35% over last fiscal, and the highest since 2013, in wake of supply disruption caused by the Russia-Ukraine war.

CAD pegged at 3% of GDP

According to the Crisil report, soaring commodity prices, slowing global growth, and supply chain snarls do not augur well for India’s current account deficit (CAD), which dropped to $13.4 billion, around 1.5% of the GDP, in Q4 FY22, from $22.2 billion in Q3 FY22. The agency expects the CAD to widen to 3% of GDP this fiscal, up from 1.2% in the financial year 2021-22.

Rupee to be at 78-level by March 23

On record slump in domestic currency, the agency says the rupee-dollar exchange rate will remain volatile, with a depreciation bias in the near-term due to a widening trade deficit and foreign portfolio investment (FPI) outflows. The strengthening of the US dollar index, owing to rate hikes by the U.S. Federal Reserve, and safe-haven demand for the dollar amid geopolitical risks, also dragged the local currency. It expects the exchange rate to settle at 78 per dollar by March 2023, compared with 76.2 a dollar in March 2022.

On Friday, the rupee fell further to hit an all-time low against the U.S. dollar in early trade amid persistent concerns over sustained inflation and continuing foreign fund outflows. The rupee touched a fresh low of 79.11 against the American currency in early trade, breaching the previous low of 78.98 hit on Thursday.

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