“High fuel and potentially fertilizer costs would later weigh on public finances, potentially limiting planned capital expenditures,” Moody’s said Thursday.
Amid high oil prices, global rating agency Moody’s has lowered its forecast for India’s GDP growth to 9.1% for fiscal year 2022, from 9.5% earlier. Moody’s said the conflict between Russia and Ukraine will hamper economic growth around the world, including India. For India, which is a net oil importer, high energy and commodity prices will hurt public finances. In addition, for the fiscal year 2023, the rating agency has cut growth forecasts 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 war between Russia and Ukraine. Going forward, the government should provide subsidies and cut taxes to ease price pressures, hurting budgeted fiscal numbers, experts say.
“India is particularly vulnerable to high oil prices as it is a major importer of crude oil. Since India is a surplus producer of grain, agricultural exports will benefit in the short term from the high prevailing prices. High fuel and possibly fertilizer costs would later weigh on public finances, potentially limiting planned capital expenditures. For all these reasons, we lowered our 2022 growth forecast for India by 0.4 percentage point,” Moody’s said in a note on Thursday.
Petroleum accounts for about a quarter of the total imports into India, while the share of fertilizers in the total imports is 1.8%. In terms of oil, India is not directly dependent on its oil needs from Russia, but sanctions against Russia, the second largest oil exporter, have led to shortages. The benchmark crude oil price rose about 25%, but recently fell below $100 a barrel in light of ongoing talks with Iran and hopes for peace talks between Russia and Ukraine.
Government can strengthen its tax defense
Earlier this week, Barclays India had also said that India will have to increase its fiscal defenses given its exposure to the conflict in Europe, mainly through the energy channel. This impact of higher energy and fertilizer prices will lead to a higher import bill and a larger current account deficit, it added. It sees the government providing tax subsidies and tax cuts to protect consumers from rising prices, just as the government has done before.
“FY22-23 budget accounted for a lower grant bill of INR 1.05trn. However, we believe that the number is likely to exceed and get closer to Rs 1.89 trillion, nearly Rs 840 billion (0.32% of GDP) higher than the original estimate, reducing the limited budgetary space the government enjoys being eaten away,” Barclays said in a statement. a note Monday.
Impact on growth
Rising commodity prices, especially crude oil prices, could also impact India’s growth. The government would either soften the blow of the high prices by cutting taxes or pass the high prices on to consumers. If it cuts taxes, it will have to increase its budget deficit, which would ultimately reduce capital expenditure and thus affect growth. And if it passes the high prices on to consumers, it will reduce their spending, which will impact growth.
Crisl said high commodity prices will impact India’s macros, including the current account deficit and inflation, and counteract growth. “We believe that fiscal policy will have to be deployed more aggressively than foreseen in the Union’s budget for the next budget,” it added.
This post Moody’s lowers Indian GDP forecast to 9.1%; high oil prices amid Ukraine outage to hurt government budget was original published at “https://www.financialexpress.com/economy/moodys-cuts-india-gdp-forecast-to-9-1-high-oil-prices-amid-ukraine-fallout-to-hurt-government-budget/2463756/”