Domestic rating agency ICRA cut its estimate of real gross domestic product (GDP) growth for FY23 on Tuesday by a sharp 0.8 percent to 7.2 percent, mainly due to the fallout from Russia’s invasion of Ukraine.
Chief economist Aditi Nayar attributed the downward revision to high commodity prices, as well as new supply chain problems stemming from the conflict in Ukraine.
It should be noted that the Reserve Bank expects GDP growth of 7.8 percent in FY23. The central bank will develop its first bimonthly monetary policy for the next fiscal year in early April, when it will revise the number.
Real GDP growth is likely to slow to 3-4 percent in Q4FY22 from 5.4 percent in Q3FY22, leading to real GDP growth of 8.5 percent in FY22.
As expected, the third wave had a much smaller impact on confidence levels than the first two waves. While early data for March 2022 is mixed, the conflict between Russia and Ukraine and the accompanying rise in commodity prices has increased uncertainty, and expected margin compression is likely to put pressure on gross value added.
“Higher prices of fuels and items such as edible oils are likely to compress disposable incomes in the middle to lower income segments, limiting the rebound in demand in FY23,” said Ms. Nayar.
She welcomed the extension of the free food grain scheme until September 2022 and said it would provide some respite to the food budgets of vulnerable households, while in middle to higher income households a normalization of behavior after the third wave will see consumption towards the contact-intensive services avoided during the pandemic.
Exports of some items will increase to meet global demand during the supply shortage. Capacity utilization is set to rise to 74-75 percent in the third quarter of FY23, from 71-72 percent in the fourth quarter of FY22, the agency said, adding it could lead to a “modest slowdown” in the highly anticipated broad base of private sector capacity expansion.
The agency said an early start to the Center’s budgeted Capex program remains critical to boost investment activity in the first half of FY23.
One concern, however, is that execution risk is shifting to the states, with a significant portion of the increase in the GOI’s budgeted capital expenditure coming from the extension of the interest-free capex loan to state governments to Rs 1 lakh crore in FY23 from Rs. 15,000 crore in FY22,” it added.
Nayar said ongoing geopolitical tensions and high commodity prices pose downside risks to the growth outlook, with margin compression depressing gross value added (GVA) growth during the conflict period.
“In addition, the K-shaped recovery looks likely to continue and the formal sector gain market share in FY23,” she said, warning that the socioeconomic trend will continue.
The agency believes healthy reservoir levels provide insurance against potentially below-average rainfall in 2022. But as economic activity normalizes, there could be a shift in agricultural labor availability in different regions, impacting acreage in some states. which is the main driver of Agri output during FY21 and FY22.
The insufficient availability of fertilizers is also a concern for the agricultural sector, indicating that the systemic inventory of all fertilizers is significantly below historical levels, mainly due to lower imports with limited availability on the international market and high prices .
So even with a normal monsoon and healthy acreage in the reservoir, production in FY23 may not increase significantly, limiting agricultural gross value added growth to less than 3 percent, the rating agency said.