The recent spike in crude oil prices, if sustained well into FY23, will pose downside risk to growth estimates of some agencies that have predicted GDP to rise in the 8-10% range in the next fiscal, the finance ministry said on Tuesday. The latest Economic Survey has pegged real growth for FY23 at 8-8.5%.
However, the Russia-Ukraine crisis is unlikely to weigh down India’s real economic growth for the current fiscal from the 8.9% projected by the National Statistical Office in its second advance estimate, it added.
In its report for February, the Department of Economic Affairs also sought to allay fears of rising inflationary pressure in the economy. Wholesale price inflation is set to drop in FY23, supported by a large base effect, while food inflation will ease due to record production of grains and good buffer stocks. “Given the inherently unsustainable nature of high prices, international commodity prices are expected to level off early with increase in supplies outside the crisis zone,” the report said.
Brent crude oil prices dropped below $100 per barrel in intraday trade on Tuesday, their lowest level since the Ukraine conflict began almost three weeks ago, as fears of supply disruption eased and as surging Covid cases in China reignited demand concerns.
Nevertheless, the report conceded that the impact of the Ukraine crisis on India’s growth, inflation, current account and fiscal deficits will hinge on the persistence of commodities prices at elevated levels.
Retail inflation scaled an eight-month peak of 6.07% in February, having hit the upper band of the Reserve Bank of India’s medium-term target of 2-6% for a second straight month. Of course, it averaged 5.4% for the April-February period of this fiscal, against 6.2% a year before.
Given that the geopolitical crisis is still evolving, it’s too early to make a plausible forecast of its impact on the Indian economy in FY23, the report said.
Nevertheless, India has “braced well” to meet the impact of rising commodity prices, it stressed. Foreign exchange reserves continue to be at comfortable levels and are large enough to finance more than 12 months of imports. Foreign investors have “largely stayed invested in the economy as the exchange rate depreciates on a flatter trajectory” shaped by exceptional growth of exports. External debt, with one-third of its value denominated in Indian currency, is considerably light at 20% of GDP to tackle any potential deterioration of trade balance.
“Its (Ukraine crisis) impact on India’s activity level in March, if any, can be assessed only a month later, when high frequency data becomes available. However, with the activity levels in February not dampening, it is unlikely that actual GDP prints of 2021-22 will be different from the levels indicated in the second advance estimates,” it said.
The report also highlighted the fact that economic activity continues to recover with upswing in the mobility, resilient power demand, healthy toll collection and E-way bill generations.
“Sustained momentum in GST revenue collection with year-on-year growth of 18% mobilizing `1.33 trillion in February 2022 also bespeaks growing business and trading turnover going beyond the festival season,” it said. Surplus systemic liquidity, rise in non-food bank credit, growth in PMI manufacturing and services, and “sturdy performance” of the railway freight traffic point at heightened economic activities, it showed.
