Rating agency Fitch on Tuesday slashed India's growth forecast for the next fiscal to 8.5 per cent from 10.3 per cent, citing sharply high energy prices on account of the Russia-Ukraine war.
With the Omicron wave subsiding quickly, containment measures have been scaled back, setting the stage for a pick-up in GDP growth momentum in the June quarter this year, the agency said.
It has revised upwards the GDP growth forecast for the current fiscal by 0.6 percentage points to 8.7 per cent.
"However, we have lowered our growth forecast for FY 2022-2023 to 8.5 per cent (-1.8 pp) on sharply higher energy prices," Fitch said while revising up its inflation forecasts.
Impact of Russia-Ukraine war
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 Sanctions seem unlikely to be rescinded any time soon," the agency said.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 per cent of the world's energy, including 17 per cent of its natural gas and 12 per cent 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 per cent.
Observing that Indian GDP growth was very strong in the December quarter, the agency said the GDP is more than 6 per cent 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.
Fitch now sees inflation strengthening further, peaking above 7 per cent in the December quarter of 2022, before gradually easing.
The agency expects inflation to remain elevated throughout the forecast horizon, at 6.1 per cent annual average in 2021 and 5 per cent in 2022.
"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.