ICRA has reduced its forecast of the year-on-year (YoY) growth of the Indian Gross Domestic Product (at constant 2011-12 prices) in FY23 to 7.2 percent from 8.0 percent.
The rating agency has projected the Gross Domestic Product (GDP) expansion in FY22 at 8.5 percent, modestly lower than the National Statistical Office’s (NSO’s) second advance estimate of 8.9 percent.
Aditi Nayar, Chief Economist at ICRA, said, “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 FY23 to 7.2 percent from 8 percent."
She said 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 FY23. "However, the prescient extension of free foodgrains under the 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, normalization of behaviours after the third wave of the COVID-19 pandemic 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.
ICRA stated that even though exports of some Indian items will rise to meet global demand amidst the supply crunch, it expects a gradual rise in capacity utilization to ~74-75 percent in Q3 FY23 from ~71-72 percent in Q4 FY22, leading to a potential modest delay in the awaited broad-basing of capacity expansion by the private sector.
In ICRA’s view, utilization 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, and sectors covered under the Public Linked Incetives (PLI) schemes. The Reserve Bank of India's most recent data pegs the capacity utilization at 68.3 percent for Q2 FY22, ICRA stated.
The rating agency stated that an early kick-off of the Indian government's budgeted capex programme remains crucial to boost investment activity in H1 FY23. However, a concern is that the execution risk is shifting to the states, with a considerable portion of the step-up in the Indian government'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 FY23 from Rs. 0.15 trillion in FY22.
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, ICRA stated.
“Moreover, the K-shaped recovery appears likely to continue with the formal sector gaining market share in FY23,” Ms. Nayar added.
Healthy reservoir levels offer insurance against a potentially below normal rainfall in 2022.
However, as economic activity normalizes, 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 FY21 and FY22, ICRA stated, adding that inadequate availability of fertilizers poses a concern.
"Systemic inventory is significantly below historic levels across all segments of fertilizers, 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%," the ratings agency added.
ICRA noted that economic activity rebounded post the rapid abatement of the COVID-19 pandemic's third wave in February 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 said.
The rating agency said it expects the YoY growth in real GDP to moderate to 3.0-4.0 percent in Q4 FY22 from 5.4 percent in Q3 FY22. The YoY expansion in real GDP is, therefore, projected at 8.5 percent in FY2022, a mild rise of 1.3 percent relative to FY20 levels, the rating agency added.
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