India's economy faces headwinds amid Russia-Ukraine crisis, says Emkay

India could face economic headwinds in the fourth quarter and the weakness could spill into the next quarter as Russia’s invasion of Ukraine slows global growth and fans inflation, according to Emkay Global Financial Services.

“Fourth quarter implied growth is also likely to be sub 5%,” Madhavi Arora, lead economist at Emkay, said in an interview with Bloomberg TV. “You could see some bump down in the first quarter of the next fiscal because of the Ukraine impact,” the Mumbai-based economist said. 

India will see lower than previously forecast economic growth because of disruptions from the latest wave of coronavirus cases and as risks mount from higher commodity prices amid Russia’s invasion of Ukraine. It will expand 8.9% in the year ending March, according to data released Monday by the Statistics Ministry, which is slower than the government’s projected 9.2% expansion.   

Potential trade disruptions could be expected in energy and other commodities as a fallout of the Ukraine crisis, which could alter global energy policy, she said. Still, the energy price shock may resolve in the coming months and may not leave a lasting mark on India’s growth, she said. While Emkay still expects 8.7% growth in the year ending in March 2023, this could change if geopolitical tensions drag, she said.

The invasion of Ukraine has upended commodity markets from oil to gas and wheat, increasing inflationary pressure. Brent crude in London rallied above $105 last week, with Goldman Sachs Group Inc. saying demand destruction is the only thing that can stop oil shooting even higher.  Every $10 a barrel increase in crude oil will see a $250 billion subsidy impact on regulated fuels in India.  

“Clearly the risk of twin deficit is rising,” if the government plans to bear the oil pain, Arora said. “The fiscal impact will be material and the current account deficit will widen to 2.5% of gross domestic product if oil prices sustain above $100 a barrel.”

Arora said she didn’t see India’s central bank reacting immediately on interest rates and the Reserve Bank of India has policy flexibility to push repo rate hikes after September. “The current real rates of India look quite reasonable versus emerging markets,” she said.