Icra lowers FY23 GDP forecast to 7.2% on higher prices, supply disruption

Rating agency cites impact of ongoing Ukraine war, China lockdowns

Rating agency Icra has slashed India’s GDP forecast for financial year 2022-23 to 7.2 per cent from eight per cent projected earlier, due to elevated commodity prices and supply chain disruptions caused by an ongoing war and lockdowns in China.

For the financial year ending March 31, the agency has lowered its GDP growth projection to 8.5 per cent, moderately lower than the National Statistical Office’s (NSO’s) second advance estimate of 8.9 per cent, it said in a statement.

“Higher prices of fuels and edible oil are likely to compress disposable incomes in the mid to lower income segments, constraining the demand revival in the next financial year starting April 1,” said Aditi Nayar, chief economist at ICRA.

However, 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, it said.

In the mid to upper income segments, normalisation of behaviours after the third wave of Covid-19  will result in pivoting consumption towards the contact-intensive services that were avoided during the pandemic, constraining the growth in demand for goods in FY23, Nayar said.

The agency said that there could be a delay in broad-basing of capacity expansion by the private sector even as exports of some items from India will rise to meet global demand amidst supply crunch. ICRA expects a gradual rise in capacity utilisation to 74-75 per cent in Oct-Dec (Q3 FY2023) from 71-72 per cent in Jan-Mar (Q4 FY2022). At present, capacity expansion is being undertaken in select sectors such as cement, steel, as well as sectors that are covered under the Production Linked Incentive (PLI) schemes.

An early kick-off of the centre’s budgeted capex programme remains crucial to boost investment activity in the first half of FY23. The capex execution risk has shifted now to states, which is a concern, as the centre has announced interest-free capex loan to states of Rs 1 trillion in FY23 from Rs 15,000 crore in FY22.

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. “The K-shaped recovery appears likely to continue with the formal sector gaining market share in FY23,” Nayar added.

GVA in agriculture may be constrained below 3 per cent even with a normal monsoon and healthy reservoir levels due to inadequate availability and elevated prices of fertilisers. Besides this, a key driver of agri output has been availability of agricultural labour which could see a shift as economic activity normalises.

Even as the third Covid-19 wave has had much smaller impact on confidence level as compared to the first two waves, the Russia-Ukraine war and associated surge in commodity prices has heightened uncertainty. The expected margin compression is likely to squeeze GVA growth, ICRA said.

The ratings agency expects the year-on-year (yoy) growth in real GDP to moderate to 3-4 per cent in Jan-Mar (Q4 FY2022) from 5.4 per cent in Oct-Dec (Q3 FY2022).