According to HDFC Bank estimates, household spending on fuel and transport could increase by nearly 2.5 percentage points in FY23 due to higher prices, which could force cuts in spending on other items as household budgets are adjusted.
Rising commodity prices as producers pass on higher transportation and input costs are also expected to affect demand. Additionally, a shift in demand for services as the pandemic subsides could affect demand for goods.
Consumption excluding fuel and transport is expected to fall by 1.7 percentage points due to high inflation forecast at 5.1 to 6.2%.
Private consumption could grow slower than 8% in FY23 due to the combined impact of all these factors on households.
Fuels and edible oils
In FY22, private consumption’s share of gross domestic product (GDP) was 56.6%, below the pre-pandemic level of 56.9% in FY20 .
Rising fuel and edible oil prices are expected to squeeze disposable incomes in middle-to-lower income segments, limiting demand recovery in the next fiscal year, said Aditi Nayar, Chief Economist, ICRA.
The Reserve Bank of India (RBI) on Friday raised the consumer inflation forecast for FY23 to 5.7% from an estimated 4.5% in February, as it cut growth forecasts for the year at 7.2% against 7.8%. “We estimate that the initial inflation impact of the European conflict is likely to be around 50 basis points, stemming from higher fuel and edible oil prices,” said Rahul Bajoria, MD and economist. Chief India Officer, Barclays.
A basis point is one hundredth of a percentage point.
HDFC Bank expects inflation of 5.5-5.7% in FY23, directly and indirectly driven by higher commodity prices. “We expect household spending on fuel and transportation to increase by nearly 2.5 percentage points in FY23 and non-fuel and transportation consumption to decline by 1.7 percentage points. “said Sakshi Gupta, Senior Economist, HDFC Bank.
A change in consumption habits can also affect the demand for goods. In middle-to-high income segments, the normalization of behavior after the third wave of Covid is expected to shift consumption towards contact-intensive services that have been shunned during the pandemic, compressing growth in demand for goods over the past fiscal year 23, Nayar said.
Consumer confidence is expected to take another hit as the Russian-Ukrainian conflict has pushed up commodity prices.
“A 10% year-over-year increase in petroleum product prices without accounting for currency depreciation is expected to push retail inflation up 42 basis points and wholesale inflation by 104 basis points,” he said. said Sunil Kumar Sinha, senior economist at India Ratings and Research.
Similarly, a 10% year-on-year increase in sunflower oil without accounting for currency depreciation is expected to push up retail price inflation by 12.6 basis points and retail price inflation by big 2.48 basis points.
“Commodity prices have increased and the situation is aggravated by the Russian-Ukrainian war and the increase in Covid cases in China which have disrupted supply chains. We expect 5.8% inflation in FY23 as supply chain disruptions escalate,” said Upasna Bhardwaj, Economist, Bank Kotak Mahindra.