Macro risk factors India CFOs should watch out for in 2023

Despite being the world’s fastest-growing major economy, India faces growth risks due to weakening rupee and global slowdown.

India remains the fastest growing major economy in the world while the US may face recession and Europe is reeling under an energy crisis and economic downturn. However, India as it is an import-dependent nation and linked to the global economy may face risks to its growth, according to a detailed research report on the Economic Times news website.

Here are the factors that can upset the demand forecast equation of the finance honchos:

Weakening rupee

The fall in US inflation has brought some respite to rupee in the last few days, but a higher trade deficit and inflation may mar growth.

Over the course of the year, the dollar’s value rose to a record level as a result of aggrieved tightening by the Fed. With the objective of reducing volatility in the rupee’s movement, the RBI has been actively intervening in the forex market. Since Mar’22, when the US Fed undertook its first rate hike, the RBI net sold $90 billion worth of forex reserves.

The rupee should depreciate to Rs82 in FY23 as compared to Rs75.8 at the end of FY22 based on the premise that rising trade deficit and steep capital outflows would hurt India’s external sector dynamic.

Any flareup of geopolitical tensions may lead to a safe haven dash for the dollar leading to a further drop in rupee value, a rise in inflation and a hit to growth.

Rising trade deficit

High commodity prices led to 33% YoY growth in imports in FY23YTD while exports are lagging at 12.3% YoY. India’s non-oil exports have been declining since July, with exports to the US falling 0.4 per cent and to the EU by 2.8%. The drop in exports hits domestic industrial growth and incomes in labour-intensive manufacturing sectors like textiles and gem and jewellery.

The resulting trade deficit would cause the current account deficit (CAD) to widen to 3.5 per cent of GDP in FY23 from 1.2 per cent in FY22. The silver lining is even at 3.5 per cent of GDP, the CAD would remain within manageable levels in FY23. A major risk could be the escalation of the geo-political crisis causing oil prices to rise from the current $90-95/ barrel to $105-110/ barrel.

Drop in consumption demand

Rural demand for fast-moving consumer goods (FMCG) in November dropped because of a loss of momentum after the festival season.

Urban demand too has been affected, but the fall in rural consumption has been steeper on a month-on-month basis.

Demand in rural areas was down 17 per cent in November over October and urban demand decreased 10.1 per cent, according to the data by Bizom, a retail intelligence platform.

Overall, India’s FMCG sales declined 15.3 per cent while they were down 2.7 per cent on an annual basis.

Weather risks to harvest

Reserve Bank Governor Shaktikanta Das stated that the agriculture sector is resilient and that rabi sowing is off to a good start. However, due to uneven rainfall, India expects some moderation in Kharif production. According to the first advance estimate, India’s total Kharif crop production will fall to 149.92 metric million tonnes (MMT) from 156.04 MMT the previous Kharif crop year.

However, a warmer-than-average winter so far remains a concern for farmers because wheat needs consistently cold temperatures of at least 15-16 degrees Celsius during the initial stages, experts said.

The India Meteorological Department predicted normal to above-normal temperatures for northwest Indian states such as Punjab, Uttar Pradesh and Haryana, which grow wheat.

Global slowdown

In the recent Monetary Policy statement, the Reserve Bank of India governor Shaktikanta Das warned about the global slowdown impacting India’s growth.

We cannot remain entirely decoupled from adverse spillovers from the global slowdown and its negative impact on our net exports and overall economic activity in an interconnected world, he said. According to him, the biggest risks to the outlook continue to be headwinds from protracted geopolitical tensions, a global slowdown, and tightening global financial conditions.