We see inflation averaging 5.4% in FY23: Crisil Chief Economist D K Joshi

In a Q&A, he says the Ukraine war-led spike in commodity prices will impact household inflation, and that the capex thrust by the Centre and states may take a slight hit

Ratings agency Crisil projected real gross domestic growth of 7.8 per cent in FY23 on Thursday. In an interaction with Arup Roychoudhury, Crisil’s Chief Economist D K Joshi said that the spike in commodity prices due to the war in Europe will impact household inflation. He said that he expects retail inflation to average 5.4 per cent in FY23, higher than the RBI’s projection of 4.5 per cent. He also expects that the capital expenditure thrust by the Centre and states may take a slight hit due to the existing global conditions. Excerpts:

Your GDP growth projection for FY23 is 7.8 per cent--slightly lower than what the government predicted through the economic survey, and at par with RBI's projections. However, RBI's numbers were before the Russian-Ukrainian war. So what is the rationale behind your prediction?

We made this projection sometimes in December, and have retained it for two reasons. One, I think, is that the Omicron wave proved to be mild. Clearly, the risks from Covid are now receding. So that creates an upside to the number we had forecast at that time. But at the same time, I think we have also seen new risks crop up suddenly. Geopolitical tensions have mounted to a very high level and are resulting in commodity and crude prices going up phenomenally. So that creates a downside to growth.

So there are two opposing forces, one of which is positive and applies particularly to the contact services, which are going to do better in 2022-23. But that gets offset by the Ukraine-Russia conflict. What will (eventually) happen we don't know as yet situation is very fluid and evolving, and the uncertainties are huge. So what we will do is we will watch crude prices. We have assumed that crude will be in the range of $85-90 a barrel in FY23.

I think that's that's the number we are working with right now. If oil prices were to shoot up, then obviously, we will have to suitably revise our outlook number. So right now, I think that's why we have kept it as it is.

Though domestic inflation is under control in terms of food items, there will be an impact of imported inflation or to domestic inflation. Do you think that the RBI’s inflation projection of 4.5 per cent holds anymore?

The central bank's 4.5 per cent inflation forecast was made before this flare up. After that the situation on commodities actually changed dramatically and will have to get into RBI’s recalculation of inflation. So, even when RBI was at 4.5 per cent, we were at 5.2 per cent. Now, what we have done is we have raised our inflation outlook to 5.4 per cent for this fiscal year.

I think on foodgrains we are in a comfortable situation. The problem is with edible oils, which we import and I think their prices have flared. So that will put some pressure on inflation. On fuel, it will depend on how the burden of global crude price spike is shared between households, the government and the oil marketing companies. For the past two months, we've seen global prices shoot up, but there's been no movement either on the excise front or on the passage to the end consumer. So this means that oil marketing companies are bearing the burden. But that's not going to be the situation. My sense is that part of the increase will get passed on to the end consumer and part of it will also be borne by the government. So it will definitely be more inflationary than what I think the central bank had assumed.

To what extent do you think current commodity prices and the global situation will impact the government's budget targets--be it revenue, capital expenditure or other aspects?

When the budget was announced, I think their assumptions on nominal GDP growth and tax collections were conservative. Now with inflation going up, I think nominal GDP is certainly going to be higher than what they had assumed. And that will be somewhat good for tax collections.

Now the issue is what happens to the expenditure. The strategy that the budget adopted was that we will push infrastructure investment to create growth. But now I think your subsidy bill is under danger. So I think the reshuffling of expenditure that government was planning to support capex will get challenged. So you have two options-- either cut capex or raise the fiscal deficit from its current level. I think they won't try to raise fiscal deficit so the expenditure will get again reshuffled. You were trying to cut revenue expenditure and push capex and that will get more difficult.

Say you have budgeted X amount of money for capex. Now with your input costs rising, you will be able to create less infrastructure, than with the same amount of money, because the prices of your steel, your cement, and everything else have gone up. So there will be cost overruns.