Here’s why Fitch slashed India GDP growth forecast for next fiscal year

When India began reopening after its nationwide lockdown in 2020, it would have hoped for a quick turnaround from its first recession after 40 years. In fact, the government and several analysts said as much. 

But almost exactly two years after the lockdown was announced, India is staring at a new global crisis that could singe its economic growth. At least that’s what ratings agency Fitch thinks. 

Fitch on Tuesday slashed India’s growth forecast for the next financial year to 8.5% from its earlier estimate of 10.3%, in the wake of rising energy prices because of the Russian invasion of Ukraine. 

This, even as India is almost fully open now, as containment measures have been scaled back as the omicron wave has subsided and coronavirus cases and deaths in the country have dropped. 

What has Fitch said about the current financial year and next?

For the current financial year, the ratings agency has revised upwards its estimates of GDP growth by 0.6 percentage points, to 8.7%. 

"However, we have lowered our growth forecast for FY 2022-2023 to 8.5% (-1.8 percentage points) on sharply higher energy prices," Fitch said while revising its inflation forecasts higher.

Fitch now sees inflation strengthening further, peaking above 7% in the December quarter. "Local fuel prices have been flat over the past weeks, but we assume that oil companies will eventually pass on higher oil prices to retail fuel prices (with some offset from a reduction in the excise duty by the government)," it added.

But why are rising prices of crude and natural gas such a big deal for India?

India imports almost 80% of its energy needs. So, an increase in the price of crude and natural gas adds to its forex outgo and leads to a skewed balance of payments.

Moreover, rising energy prices are passed on to the end consumer, causing an inflationary impact in the domestic economy as prices of all commodities and finished goods rise.

This is not all. As prices begin to rise globally, foreign institutional investors begin withdrawing their money from emerging markets like India to their home countries of the US and Europe, leading to the local markets taking a hit. 

What has Fitch said about the overall global outlook?

In its Global Economic Outlook-March 2022, Fitch said the post-Covid-19 pandemic recovery is being hit by a potentially huge global supply shock that will reduce growth and push up inflation.

"The war in Ukraine and economic sanctions on Russia have put global energy supplies at risk. Sanctions seem unlikely to be rescinded any time soon," the agency said.

Russia supplies around 10% of the world's energy, including 17% of its natural gas and 12% of oil.

"The jump in oil and gas prices will add to industry costs and reduce consumers' real incomes...Higher energy prices are a given," Fitch said as it cut the world GDP growth forecast by 0.7 percentage points to 3.5%.

But is Fitch completely negative on the India growth story?

Not really. Fitch says that the Indian GDP growth was very strong in the December quarter. It also said the GDP is more than 6% above its pre-pandemic level though it is still well below its implied pre-pandemic trend.

"High-frequency data indicate that the Indian economy has ridden out the Omicron wave with little damage–in stark contrast with the two previous coronavirus waves in 2020 and 2021," it said.