Fitch cuts FY23 growth forecast to 8.5%, cites soaring energy prices

The rating agency said post-pandemic recovery is being hit by a potentially huge global supply shock that will reduce growth and push up inflation

Fitch Ratings on Tuesday downgraded its growth forecast for India by 180 basis points to 8.5 per cent for 2022-23, citing sharply higher energy prices. The extent of the downward revision in growth forecast for India is second only to Germany among major economies.   

Russia’s invasion of Ukraine and the economic sanctions on Russia have led to high energy prices, supply-chain disruptions, raw material shortages, and record inflation rates. The resultant deterioration of growth momentum led Fitch to cut its world gross domestic product (GDP) growth forecast for calendar year 2022 (CY22) by 0.7 percentage points to 3.5 per cent in its latest Global Economic Outlook-March 2022.

The rating agency also revised upward its inflation forecast for India on rising fuel costs.

“We have revised up our inflation forecasts. Local fuel prices have been flat over the past weeks, but we assume that oil companies will eventually pass on higher oil prices to retail fuel prices (with some offset from a reduction in the excise duty by the government). We now see inflation strengthening further, peaking above 7 per cent in the third quarter of CY22, before gradually easing. We expect inflation to remain elevated throughout the forecast horizon, at 6.1 per cent annual average in calendar year 2021 (CY21) and 5 per cent in CY22,” said Fitch, ahead of oil-marketing companies hiking prices of petrol, diesel, and cooking gas after a gap of four months.

Fitch said the high-frequency data indicates that the Indian economy has ridden out the Omicron wave with little damage, in stark contrast with the two earlier pandemic waves in calendar year 2020 and CY21.

“The Purchasing Managers' Index for the services sector showed only a slowdown in activity in January and February – well short of an outright decline. Industrial production managed to record a small rise in January, at the height of the Omicron-driven wave. With the wave subsiding quickly, containment measures have been scaled back, setting the stage for a pick-up in GDP growth momentum in the second quarter of CY22,” it added.

Separately, the Organization for Economic Co-operation and Development (OECD) on Tuesday said India’s real GDP is projected to grow at 8.1 per cent in CY22 and 5.5 per cent in calendar year 2023.

“On the upside, Budget measures for 2021-22, including higher infrastructure spending, could support post-pandemic recovery. On the other hand, the evolution of the pandemic remains a significant downside risk to the outlook. The deterioration of the situation on the fiscal front is also worrisome, with public debt now stabilising at a high level of 90 per cent of GDP. In addition, the financial sector is constrained by a non-performing asset ratio standing at 6.9 per cent in September 2021,” observed OECD.

The rating agency said the monetary policy normalisation by India’s central bank has been very shallow to date.

“The Reserve Bank of India has prioritised economic recovery over tackling inflation amid a still-large output gap. We still expect the repo rate to rise to 4.75 per cent by December, from 4 per cent currently. The reverse repo rate – which has become the effective driver of money-market rates since the start of the pandemic – is likely to be increased by a larger amount,” said Fitch.

Prior to Russia’s invasion of Ukraine, global economic recovery was on track, including India’s recovery in CY21 that was also faster than expected at 8.1 per cent.  

Fitch said there is uncertainty about the willingness of China, India, and other large economies that have not imposed sanctions on Russia to sharply increase their oil imports from there.

“Such moves could result in a redirection of Russian supplies eastward, reducing these countries’ demand for oil from elsewhere. Besides willingness issues - and the fear of ‘secondary’ sanctions - there are practical constraints to a rapid rebalancing of global energy trade flows. A high share of energy trade is pipeline-based and increasing shipping-based flows could run into sanctions constraints and insurance issues,” added Fitch.