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India economic outlook

Strong economic fundamentals will likely help India avoid the long-term impacts of the ongoing conflict in Ukraine.

Right when the global economy seemed to be at the cusp of witnessing green shoots of recovery after leaving the worst of the COVID-19 pandemic behind (despite uncertainties associated with subsequent waves of infection and rising global inflationary pressures), the Russia-Ukraine crisis escalated. Consequently, prices of crude oil and gas, food grains such as wheat and corn, and several other commodities have shot up.1 The conflict has also brought in severe financial sanctions and political pressure on Russia from the rest of the world, primarily the Western powers. It is obvious that these will likely have unpredictable and undesired implications on the global financial system and economy. Global investors, for instance, are shoring up their money into safer-haven assets such as gold and US Treasuries,2 while equity markets in emerging countries, which were seeing capital outflows since the US Federal Reserve’s announcement to taper asset purchases in November, are in a state of flux.3

It is, therefore, no surprise that the war in Ukraine and its potential economic impact have forced several economic forecasters to go back to their drawing boards and revise their growth projections for this year—most now point to less-than-expected growth in 2022. Even though there is little visibility into how long the conflict will last, our economists believe that the crisis could hurt growth in the United States and the United Kingdom by 0.3–0.5% in 2022.4

Understandably, the crisis has clouded India’s growth outlook as well. Crude oil prices are lingering above US$100 per barrel, wheat has gone up by 50% in the last two weeks and, edible oil prices are up 20%—all of which are critical imports from the two warring nations.5 India also partly meets its fertiliser needs from the region. For India, which has been battling inflation for a while now, this situation is making matters worse. Higher fuel and fertiliser prices will reduce government revenues and increase subsidy costs. Furthermore, capital outflows and rising import bills will weigh on the current account balance and currency valuation.

It’s not just India, but almost all emerging economies are reeling under these external shocks. We, however, believe that India’s underlying economic fundamentals are strong and despite the short-term turbulence, the impact on the long-term outlook will be marginal. The results of growth-enhancing policies and schemes (such as production-linked incentives and government’s push toward self-reliance) and increased infrastructure spending will start kicking in from 2023, leading to a stronger multiplier effect on jobs and income, higher productivity, and more efficiency—all leading to accelerated economic growth. Furthermore, the emphasis on manufacturing in India,6 various government incentives such as lower taxes, and rising services exports on the back of stronger digitisation and technology transformation drive across the world will aid in growth.7 Also, several spillover effects of geopolitical conflicts could enhance India’s status as a preferred alternate investment destination. Global in-house centers and multinationals, for instance, may prefer India over Eastern European markets (especially those that border Ukraine) to shift their current operations or open new facilities. On the health front, a large, vaccinated population will likely help contain the impact of subsequent infections waves, if any.

On the back of these factors, we expect India to grow at 8.3–8.8% during FY2021–22, followed by equally strong growth of more than 7.5% and 6.5% in the next two fiscal years, respectively. This will likely mean that the baton for the fastest-growing emerging country will be passed on from China to India in the coming years.  

A look back at the quarter


GDP grew by 5.4% during October–December 2021 (Q3 FY2021–22), slower than we had earlier estimated (figure 1). Growth in the July–September quarter was revised up to 8.4%, which explains the fading recovery in the subsequent quarter. The uneven (modest, at best) recovery in a few sectors, especially agricultural, manufacturing, and contact-intensive services sectors, weighed on the overall growth.

On the expenditure front, although festive demand and reduced infections boosted private consumption, growth momentum slowed compared to previous quarters (figure 1). Slower-than-expected demand growth and lower capacity utilisation weighed on the momentum in gross fixed capital formation growth. Even government expenditure declined this quarter. However, exports maintained a strong momentum, pushing the overall growth upward.

Consumer price inflation (CPI) breached the upper band of the Reserve Bank of India’s (RBI’s) comfort zone (of 4%+2%) and grew by 6% in January 2022 as against 5.7% in the previous month. Wholesale price inflation also jumped to a decadal high of 12.96% (figure 2). Prices rose primarily because of logistics and supply chain disruption as the number of infections increased and regional lockdowns were imposed. Prices of food commodities—led by vegetables, edible oils, and poultry products—witnessed sharp increases.8

On a positive note, there was a visible growth in credit uptake in FY 2021–22, with agricultural and industrial sectors and personal loans driving the uptick (figure 3). Falling gross nonperforming asset (GNPA) ratios in the industry sector (by 7.6% in three years) contributed to a significant rise in lending to this sector. Credit growth in the services sector, meanwhile, remained muted while the GNPA ratio remained higher than prepandemic levels. Banks and nonbanking financial companies (NBFCs) have healthier balance sheets and provisions compared to the levels seen in 2018. They are in a better position to lend and remain resilient in case of rising stress in the financial sector due to sanctions on Russia. However, credit growth remains far below the 2019 levels and is in need of an uptick at a sustainable pace.9

What lies ahead?

While we are still in the last quarter of the fiscal year, we are probably better placed to forecast for the entire year. The rapidly spreading, although milder, omicron outbreak curtailed economic activity in January. High-frequency indicators such as mobility indices, passenger traffic, and consumer and investor confidence all suggest a dampened economic activity in the month.10 Heightened geopolitical uncertainties since February have impacted commodity and food prices. In short, growth in the last quarter of the current fiscal year is expected to be slightly lower than previously expected. Therefore, we have revised down our growth projections for the entire fiscal year by 45 basis points and, as mentioned earlier in the article, we expect it to range between 8.3% and 8.8%.

To aid our projections for the next two years, we created two scenarios—baseline and pessimistic—primarily based on the possibility of fresh variants of the virus emerging on the scene and the evolution of the Russia-Ukraine crisis in the coming months. One of the anchoring variables for India will be the fluctuation in oil and gas prices, and thus, we have assumed different oil price paths for each scenario (figure 4).

In our baseline scenario, we expect the crisis in Ukraine to improve, if not completely end. Consequently, with reduced uncertainties, businesses and investors focus on fundamentals and growth potential in the latter half of the year. The economic impact of the subsequent infection waves will remain marginal, thanks to the improved vaccination coverage. The Indian government and the RBI work toward balancing growth and inflation concerns, as well as containing capital flight as the US Fed raises policy rates. We associate a higher probability with this scenario becoming a reality.

In our pessimistic scenario, the crisis continues for a prolonged period. This has second-order implications on financial stability and supply chain disruptions, especially in the semiconductor, food, and auto industries, considering Russia and Ukraine remain major suppliers of critical raw materials (palladium and neon, among others). Furthermore, in this scenario, we consider the possibility of the subsequent waves of COVID-19 to have relatively greater impact on the economy. However, given the current state of geopolitical situation and the pandemic the world over, we do not associate a high probability with this scenario (for a more nuanced overview of how the two scenarios may play out, see figure 5).

In our baseline scenario, we expect India’s GDP growth to range between 7.5% and 8.0% in FY2022–23 and between 6.7% and 7.1% in FY2023–24. Furthermore, we expect pent-up demand to pick up with a slight delay as partial pass-through of higher food and oil prices (with a lag) weighs on consumers’ sentiments and pockets. Businesses will wait for demand cues and assess cost escalations before investing. We expect growth to gain momentum from the second quarter of FY2022–23 as uncertainties abate (figure 6). The initial panic may result in capital outflows (which we have been seeing lately) and currency might depreciate rapidly, but both will likely recover some of the lost ground by the end of 2022. The government raises fuel prices with a lag as reduced excise duties help in absorbing the rising global prices. Consequently, the fiscal deficit deteriorates marginally because of higher subsidies (for fertilisers) and reduced excise duty revenues from oil but with no long-term implications on the government’s consolidation targets.

Under the pessimistic scenario, economic fundamentals deteriorate and growth suffers. Inflation remains high and financial stress results in poor credit growth and lesser capital spending. The fiscal deficit remains significantly above the targeted consolidated values over the two years.

In both situations, inflation will likely be the wild card over the next year. The sharply rising oil and gas, commodity, and food and fertiliser prices may trigger terms-of-trade shock and result in cost-push inflation. Supply disruptions and sanctions will add to global inflation, which will also feed into domestic prices. While production-cost escalations across industries will result in higher producer prices, the impact on consumer prices will depend on the degree of pass-through to consumers. Furthermore, the rapid reopening of the economy that is currently underway will drive growth in contact-intensive services sectors, which have been laggards so far. This will push prices for services up as well, adding to the inflation woes.

We expect inflation to skyrocket in the next few quarters of FY 2022–23 because of higher food and fuel prices and negative terms of trade (figure 7). The RBI will likely lean toward containing prices and, therefore, raise policy rates. (The US Fed is expected to raise its policy rates more frequently compared to its policy tightening in 2014 to control inflation in the United States. Capital flight among foreign institutional investors and currency depreciation among emerging economies remain a strong possibility. The RBI will be under pressure to contain the outflow and raise yields and, therefore, will likely follow similar a similar suit.) However, the RBI will be watchful of how the inflation dynamics play out—it may accordingly decide to use other policy instruments to keep inflation and currency depreciation in check. The frequency and the number of hikes will also depend on how gradual the demand recovery is and whether credit tightening is successful in deescalating inflation.

The next few months will be critical for India’s economy as the government and the RBI work at balancing the stress on inflation, currency, external accounts, and fiscal deficit. The good news is, India has endured the pandemic for over two years and has come out of it more resilient. The hope is that the current pressures on the economy too shall pass!


Deloitte Global Economist Network


The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

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  1. Data on commodity prices, accessed from Haver Analytics.

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  2. Alun John, Samuel Shen, and Dhara Ranasinghe, “In already bumpy year, Russia’s attack on Ukraine sets stage for more market swings,” Reuters, February 24, 2022.


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  3. Data on equity markets, accessed from Haver Analytics.


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  4. Ian Stewart, “Ukraine crisis: An economic assessment—The Monday Briefing,” Deloitte, February 28, 2022.

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  5. Economic Times, “Indians stock up cooking oil, fuel, fearing shortages amid Ukraine war,” March 8, 2022; Economic Times, “Vladimir Putin may have just ruined your weekend plans,” March 9, 2022.


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  6. Make in India, “Home,” accessed March 29, 2022.


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  7. Export data sourced from the Centre for Monitoring Indian Economy (CMIE) database.


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  8. Components of prices are analyzed from the CMIE database.


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  9. Data on bank and NBFC balance sheets and credit growth are analyzed from the CMIE database.

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  10. Several high-frequency data points were analyzed from the CMIE database.


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Cover image by: Jaime Austin

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