ICRA has cut its forecast of India’s GDP growth (at constant 2011-12 prices) in FY23 to 7.2 per cent year-on-year (YoY) from 8 per cent, citing elevated commodity prices and fresh supply chain issues arising from the Russia-Ukraine conflict as well as the renewed lockdowns in parts of China.
The rating agency has projected the GDP expansion in FY22 at 8.5 per cent, modestly lower than the National Statistical Office’s (NSO’s) second advance estimate of 8.9 per cent.
The projected expansion in real GDP in FY22 is a mild rise of 1.3 per cent relative to FY20 levels.
Aditi Nayar, Chief Economist, ICRA, observed that 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 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,” 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 around 74-75 per cent in Q3 (October-December) FY23 from around 71-72 per cent in Q4 (January-March) FY22, 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 per cent 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 (production linked incentive) schemes. The most recent data released by the RBI pegs the capacity utilisation at 68.3 per cent for Q2 (July-September) FY22,” the agency said.
The agency opined that an early kick-off of the Centre’s budgeted capex programme remains crucial to boost investment activity in H1 FY2023.
Concerns over capex
However, a concern is that the execution risk is shifting to the States, with a considerable portion of the step-up in the Centre’s budgeted capital spending coming through the enlargement in the size of interest-free capex loan to State governments to ₹1 lakh crore in FY23 from 15,000 crore 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.
“Moreover, the K-shaped recovery likely to continue with the formal sector gaining market share in FY23,” Nayar added.
ICRA assessed that healthy reservoir levels offer insurance against a potentially below normal rainfall in 2022.
Growth in agriculture
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 FY21 and FY22.
“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 FY23, constraining agricultural GVA growth below 3.0 per cent,” the ratings agency said.