Amid high oil prices, global rating agency Moody’s has cut its forecast for India’s GDP growth to 9.1% for the fiscal year 2022 from 9.5% earlier. Moody’s said Russia-Ukraine conflict will hamper economic growth around the world, including India. For India, which is a net oil importer, high energy and commodity prices will hurt the government’s finances. Additionally, for the fiscal year 2023, the rating agency has cut growth projections for India by 10 basis points to 5.4%.
Last month, Moody’s had raised its GDP expectations for India, but the situation has since changed, in light of the Russia Ukraine war. Going ahead, the government would have to provide subsidies and cut taxes in order to ease price pressure, which will hurt its budgeted fiscal numbers, experts say.
“India is particularly vulnerable to high oil prices given that it is a large importer of crude oil. Because India is a surplus producer of grain, agricultural exports will benefit in the short term from high prevailing prices. High fuel and potentially fertilizer costs would weigh on government finances down the road, potentially limiting planned capital spending. For all of these reasons, we have lowered our 2022 growth forecasts for India by 0.4 percentage point,” Moody’s said in a note Thursday.
Petroleum accounts for about one-fourth of India’s total imports while fertilisers share in total imports is 1.8%. In terms of oil, India does not directly depend on its oil needs from Russia, but sanctions on Russia, the second largest oil exporter, have led to shortages. Benchmark crude oil prices shot up by about 25% but it recently came down, below the $100 per barrel mark, in the light of ongoing Iran talks and hopes of Russia-Ukraine peace talk.
Government may up its fiscal defences
Earlier this week, Barclays India had also said India will have to raise its fiscal defences considering its exposure to the conflict in Europe primarily through the energy channel. This impact of higher energy and fertiliser prices will lead to a larger import bill and wider current account deficit, it added. It sees the government providing fiscal subsidies and tax cuts in order to shield the consumers from rising prices, just like the government has done previously.
“The FY22-23 budget factored in a lower subsidy bill of INR1.05trn. However, we believe the number is likely to overshoot and come in closer to Rs 1.89 trillion, almost Rs 840 billion (0.32% of GDP) higher than the original estimate, eating into the limited fiscal space that the government enjoys,” Barclays said in a note Monday.
Impact on growth
Spiking commodity prices, especially crude oil prices, could also impact India’s growth. The government would either soften the blow of high prices by cutting taxes or it would pass on the high prices to consumers. If it cuts taxes, it will have to widen its fiscal deficit, which would eventually crunch capital spending and hence impact growth. And if it passes on the high prices to consumers, that will reduce their spending, and it will impact Growth.
Crisl said high commodity prices will have a bearing on India’s macros, including the current account deficit and inflation, and it would create headwinds to growth. “We believe the fiscal policy will need to be deployed more aggressively than envisaged in the Union Budget for next fiscal,” it added.