India's GDP growth expected at 7.8% in fiscal 2023, risks to growth tilted to the downside: CRISIL

India's gross domestic product (GDP) growth is expected to come in at 7.8 per cent in fiscal 2023, said Research firm CRISIL. The ongoing geopolitical turmoil in Europe between Russia & Ukraine has offset any potential upside due to the early end of a mild third wave of Covid-19 infections, it said.

On the inflation front, CRISIL has opined that the average Consumer Price Index (CPI)-based inflation, will stay firm at 5.4% next fiscal — if the price of crude oil averages $85-90/barrel — and takes into account the excise duty cuts announced last year. But the upside risks will build if the geopolitical strife prolongs, reports Economic TImes.

"Spiking commodity prices, especially of crude oil, will have a bearing on India's macros, including the current account deficit and inflation. These would create headwinds to growth. The good part is, the health of the financial sector is on the mend, with better capitalisation, profitability and asset quality," Amish Mehta, Managing Director & CEO, CRISIL said.

The tensions in Europe are creating a dampening effect on global growth and pushing up oil and commodity prices. Early on, following Russia's invasion of Ukraine, crude oil prices had surged but have stabilised a tad since, in an extremely volatile week. Global benchmark Brent crude traded as high as $139 and as low as $105 so far this week.

Analysts expect the higher price of crude oil to widen India's current account deficit to 2.2% in the upcoming fiscal. A $10 increase in the price of crude oil increases the current account deficit to GDP ratio by about 40 basis points.

"The near-term impact of high oil prices on inflation, assuming a significant passthrough, will be more pronounced than on growth. However, all bets are off if oil stays around or above $100/barrel for a prolonged period," CRISIL said.

It may be noted that the last time price of crude oil averaged $110/barrel between FY12-14, the inflation was in double-digits. But the firm has said that that may not happen this time around This time the domestic prices of foodgrains are relatively benign following sumptuous agricultural output and comparatively lower core inflation. "During that period, food and core inflation, which together have 86% weight in CPI, had averaged 9.8% and 8.6%, respectively," the note said.

Private consumption, which is the largest component of demand and has been the slowest to recover from the pandemic, will also face headwinds from high inflation.

"We believe the fiscal policy will need to be deployed more aggressively than envisaged in the Union Budget for next fiscal. This can be done by increasing allocation for employment-generating schemes and food subsidy, and cutting duty on petroleum products. This can be a relief bridge for those most affected by the pandemic till such time the virtuous cycle of investment-led growth plays out in the labour market, and private consumption demand becomes self-sustaining," CRISIL Chief Economist Dharmakirti Joshi said.