Fitch cuts FY23 India GDP estimates by 180 bps to 8.5%

On Tuesday, 22nd March, Fitch Ratings reduced India’s GDP growth estimates for FY23 by a total of 180 basis points from 10.3% previously to 8.5%. Fitch expects the rapid rise in inflation, driven by crude prices, to be a major headwind for India in the coming months.

Crude has already rallied by 75% in the last 3 months and the Indian government is yet to pass on the full impact of the cost increase via petrol and diesel price hikes.
 

Check - Price of bulk diesel increased by Rs.25 per litre 


Here are some interesting observations made by Fitch and the justification for lowering the GDP growth target for FY23 from 10.3% to 8.5%. Ironically, the revised estimated of FY22 growth stands upgraded from 8.1% to 8.7%.

But this is more of a reversal of the previous downgrade. Fitch expects that in the short term, the rapid recovery from COVID should be favourable. But Fitch remains cautious on FY23 data due to oil and FPI outflows.

The chief economist of Fitch has prophetically said that global inflation was back with a bang. This is the first time in almost 20 years that prices were rising so fast. RBI continued to maintain projected inflation for FY23 at a very reasonable 4.5%.

However, Fitch is of the view that once the higher costs of oil are passed on to the end customer, the actual rate of inflation could go up sharply above 7%. That is expected to negatively impact growth.
 

Does this mean that Fitch is short term positive and medium term negative on India. In a way yes. In the short run, most of the rating agencies perhaps underestimated the resilience of the Indian economy and its ability to bounce back.

The recovery from the pandemic and even subsequent recoveries from the Omicron scare has been quite impressive. With adequate support from the government, the recovery had been catalysed.

However, Fitch is of the view that the kind of resilience and government support would not be feasible for FY23. That is largely because high inflation would impose a huge cost on India in terms of cost of goods and services, consumer purchasing power and the ability of companies to grow amidst erratic demand.

That is the reason, Fitch has specifically downgraded the growth for FY23 by 180 bps to 8.5%, which does look quite large.

This projection was made as part of the Global Economic Outlook report authored by Fitch Ratings. Not only has Fitch downsized India’s GDP growth, but even the GDP growth of the world economy for 2022 has been cut sharply by 70 bps from 4.2% to 3.5%.

Even for the global economy, the pressure is likely to come from a combination of higher oil prices and overall supply chain disruptions caused by the ongoing Russia Ukraine war.

Coming back to the India story, Fitch has specifically pointed out that India’s monetary policy normalisation has been shallow and spasmodic till date. For too long, the RBI had tried to prioritize growth over inflation control, but Fitch feels now the focus will have to shift to tackling inflation.

In fact, Fitch expects repo rates in India to spike by 75 bps from 4% to 4.75% by December 2022. That is likely to be a negative factor amidst an output gap.