India Ratings sees FY23 GDP growth at 7.6% on sustained govt spending

India Ratings & Research (Ind-Ra) expects gross domestic product (GDP) to grow 7.6 per cent in fiscal year 2022-23 (FY23), helped partly by continued government spending and a favourable global trade outlook, the ratings agency said on Thursday.

“After two years, the Indian economy will show a meaningful expansion, as the real GDP in FY23 will be 9.1 per cent higher than the FY20 (pre-Covid level) GDP level. However, the size of the Indian economy in FY23 will be 10.2 per cent lower than the FY23 GDP trend value,” said Sunil Kumar Sinha, principal economist with Ind-Ra.

“A continued weakness in private consumption and investment demand is estimated to contribute 43.4 per cent and 21.0 per cent, respectively, to this shortfall. However, if the impact of Omicron on Q4FY22 growth turns out to be greater than Ind-Ra’s estimate, then there could be some upside to the FY23 growth originating from the base effect,” Sinha said.

The economic recovery was encouraging, he said, and restrictions put in place by many states to contain the current wave of Covid-19 were not as severe as the second wave. Nonetheless, there are risks to the ongoing recovery, the ratings agency warned. It pointed to the latest FY22 GDP advance estimates, which show that private final consumption expenditure (PFCE) — the largest component of GDP (58.6 per cent) from the demand side and a proxy for consumption demand — is projected to grow only 6.9 per cent YoY in the current year, despite a low base and sales data of many consumer durables showing robust growth.

“This indicates that the consumption demand is still weak and not broad-based. In fact, the slowdown in PFCE had begun even before the pandemic had hit the economy,” Sinha said.

“The Reserve Bank of India’s (RBI’s) consumer confidence survey shows that consumer sentiments, which had collapsed May 2019 onwards, have yet not recovered to the pre-Covid levels. Wage growth both in the rural and urban areas is facing significant headwinds and has been declining since mid-2020.”

Also, inflation-adjusted wages are indicating erosion of households' purchasing power and rising expenditure costs have impacted consumption demand.

The ratings agency said it estimates investments, as measured by gross fixed capital formation (GFCF), to grow 8.7 per cent YoY in FY23. “Private investments have been down and out over the past several years and Ind-Ra believes the revival of private investment demand will be a slow and drawn-out process,” it said.

“Given that the economy is still in need of policy support, the government is unlikely to be in a hurry to move back to the path of fiscal consolidation. Ind-Ra, therefore, expects fiscal deficit to come in at 5.8-6 per cent of GDP in FY23.”

Ind-Ra said it expects merchandise exports to grow 18.3 per cent YoY in FY23 owing to a favourable global trade outlook.