Growth Drivers for FY 23: Re-evaluating India’s Macro Scenarios

24 March 2022

A fast-changing geopolitical environment has upended commodity markets leading Citi economists to recalibrate macro forecasts amidst Commodity Price Inflation. The Growth drivers for FY 23 which are likely to shape the recovery path of the Indian Economy. Key Points appended Below:

• 1. Urban Consumption: Citi Analysts expect reopening led urban consumption to be a key support factor in FY23. Pent-up saving led consumption has mostly played out in FY22 and further support from excess savings is going to be limited with Core inflation likely to remain above pre-Covid levels that may bite into real wages. Pace of improvement in urban consumption expected to remain subdued in 1HFY23



• 2. Rural Growth: Rural growth is at crossroads due to lower consumption support from social security related budget spending and higher capital spending could support non-farm rural jobs
• 3. Capex Focus: Driven by the impetus received by Capex during the union budget our economists expect revival in investment in FY23.The risk to capex revival view is tilted towards the downside, due to repeated supply side disruptions.
• 4. Input Cost Pressures and Geopolitical Environment: Investment recovery may get derailed on account of renewed input cost pressure and geopolitical tension. Uncertainty increases delays in investment decisions. For example, RBI had earlier estimated that a 10% increase in Brent prices is associated with 15bps downward pressure on real GDP growth.
• 5. Investment Recovery: There is a negative correlation between uncertainty and investment growth, which will be relevant with heightened geopolitical tensions. Sustaining the export growth momentum of FY22 could be an additional headwind for FY23 GDP growth. India’s export demand could be impacted if there is wider European economic slowdown( India’ s direct trade linkages with Russia and Western Europe is limited).Risks to global activity is likely to weigh on India’s goods export demand in at least 1HFY23.



• 6. Fiscal and Monetary Policy: The pace and quantum of policy stimulus will be a key factor that will drive growth in FY23.
• 7. GDP Forecast: Urban Consumption and Private Capex revival is expected to play a pivotal role in Indian economy’s growth recovery. However, they are at risk along with export demand on account ongoing geopolitical tensions leading to supply side shocks. This may cause a delay in private capex recovery due to rising uncertainty and elevated input prices, Pace of improvement in urban consumption could remain subdued in HFY23 and an adverse Impact on export demand due to global growth demand. Our FY23 real GDP growth forecast has been revised downwards by 50bps to 7.5%YY.

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