India’s economic recovery slows amid growing external risks

India’s economy will grow slower than previously forecast because of disruptions from the latest wave of coronavirus cases and as risks mount from higher prices of commodities amid Russia’s invasion of Ukraine.
Gross domestic product will expand 8.9% in the year ending March 31 after a 6.6% contraction last fiscal, according to the data released by the Statistics Ministry on Monday. While that recovery will be the quickest among major economies, it’s slower than the median 9.1% pace estimated in a Bloomberg survey of economists, and 9.2% expansion projected by the government last month.
The slowing momentum follows activity curbs spawned by the Omicron variant of the virus and external risks, most notably from high commodity prices that are being exacerbated by the Russia-Ukraine crisis. A weaker pace of expansion could hurt investment and job creation, testing fiscal and monetary policies that have remained loose despite rising inflationary pressures.
“The downsized GDP growth should be seen as a combination of revision to last year’s number and impact of Omicron wave getting captured,” said QuantEco Research economist Yuvika Singhal. “The Ukraine-Russia geopolitical risk still remains a developing story which may have not been fully captured.”
Higher oil prices on account of the conflict can worsen the outlook for inflation and impact disposable incomes in a nation where private consumption accounts for some 60% of GDP. It can also widen the current-account gap and be a drag on the rupee, which is seen touching a record low in the coming months.
n Manufacturing output is seen increasing 10.5% this fiscal year, while mining sector is seen growing 12.6%. Farm output, a bright spot during the pandemic, is forecast to rise 3.3%.
n Gross fixed capital formation, a proxy for investment, is forecast to increase 14.6%, whereas government spending is seen rising 4.8%. Private consumption is expected to rise 7.6% from a year ago.
n Data also showed GDP in the three months to December grew 5.4%, missing estimate for a 5.9% expansion. Gross value added, a key input of GDP that strips out the impact of taxes on products, rose 4.7% versus 5.7% estimate.
n The quarterly estimates are for the period before the Omicron variant of the coronavirus began spreading, forcing many Indian states to impose curbs.
Prime Minister Narendra Modi’s government last week flagged that the pandemic recovery will be challenged by geopolitical risks.