ICRA has reduced its forecast of the year-on-year (YoY) growth of the Indian GDP (at constant 2011-12 prices) in FY2023 to 7.2 percent from 8.0 percent.
The rating agency projects the GDP expansion in FY2022 at 8.5 percent, modestly lower than the National Statistical Office’s (NSO’s) second advance estimate of 8.9 percent.
According to Aditi Nayar, Chief Economist, ICRA Ltd: “Following the elevated commodity prices and fresh supply chain issues arising from the Russia-Ukraine conflict, as well as the renewed lockdowns in parts of China, we have pared our forecast of India’s real GDP growth in FY2023 to 7.2 percent from 8.0 percent.
“Higher prices of fuels and items such as edible oils are likely to compress disposable incomes in the mid to lower income segments, constraining the demand revival in FY2023. However, the prescient extension of free foodgrains under Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) until September 2022 may continue to offer some respite to the food budgets of vulnerable households.
"In the mid to upper income segments, normalisation of behaviours after the third wave is set to result in a pivot of consumption towards the contact-intensive services that were avoided during the pandemic, constraining the growth in demand for goods in FY2023,” Nayar said.
Even though exports of some items from India will rise to meet global demand amidst the supply crunch, ICRA expects a gradual rise in capacity utilisation to 74-75 percent in Q3 FY2023 from 71-72 percent in Q4 FY2022, leading to a potential modest delay in the awaited broad-basing of capacity expansion by the private sector.
In ICRA’s view, utilisation would need to cross 75 percent for broad-based capacity expansion to be undertaken by the private sector. At present, capacity expansion is being undertaken in select sectors such as cement, steel, as well as sectors covered under the PLI schemes. The most recent data released by the RBI pegs the capacity utilisation at 68.3 percent for Q2 FY2022.
An early kick-off of the Government of India’s (GoI’s) budgeted capex programme remains crucial to boost investment activity in H1 FY2023. However, a concern is that the execution risk is shifting to the states, with a considerable portion of the step-up in the GoI’s budgeted capital spending coming through the enlargement in the size of interest-free capex loan to the state governments to Rs. 1.0 trillion in FY2023 from Rs. 0.15 trillion in FY2022.
Regardless, protracted geopolitical tensions and high commodity prices pose downside risks to the growth outlook, with margin compression set to squeeze the growth of the gross value added (GVA) during the period of the conflict. “Moreover, the K-shaped recovery appears likely to continue with the formal sector gaining market share in FY2023,” Nayar added.
Healthy reservoir levels offer insurance against a potentially below normal rainfall in 2022. However, as economic activity normalises, there could be a shift in the availability of agricultural labour across different regions, affecting acreage in some states, which has been the key driver of agri output during FY2021 and FY2022. Besides, inadequate availability of fertilisers poses a concern.
Systemic inventory is significantly below historic levels across all segments of fertilisers, chiefly on account of lower imports amid limited availability in the international market, and elevated prices. Thus, even with a normal monsoon and healthy reservoir levels, acreage and, therefore, output may not rise meaningfully in FY2023, constraining agricultural GVA growth below 3.0 percent, the ratings agency added.
ICRA noted that economic activity rebounded post the rapid abatement of the third wave of COVID-19 in February 2022 and the lifting of the state-wise restrictions. As expected, the third wave had a much smaller impact on confidence levels relative to the first two waves. While the early data for March 2022 is mixed, the Russia-Ukraine conflict and the associated surge in commodity prices has heightened uncertainty, and the expected margin compression is likely to squeeze GVA growth.
ICRA expects the YoY growth in real GDP to moderate to 3.0-4.0 percent in Q4 FY2022 from 5.4 percent in Q3 FY2022. The YoY expansion in real GDP is, therefore, projected at 8.5 percent in FY2022, a mild rise of 1.3 percentrelative to FY2020 levels.