ICRA cuts 2022-23 GDP growth forecast to 7.2% from 8%


The agency cites likely implications for the revival in demand as incomes are depressed by high fuel and commodity prices

The agency cites likely implications for the revival in demand as incomes are depressed by high fuel and commodity prices

Rating agency ICRA has lowered its forecast for India’s GDP growth for 2022-23 to 7.2% from 8%, citing elevated commodity prices and supply chain challenges due to the Russia-Ukraine conflict, as well as higher fuel and cooking oil prices dampen demand to tight household incomes.

The agency expects growth of 8.5% this year, below the National Statistics Office’s official flash estimate of 8.9%, it said in a statement Tuesday. Protracted geopolitical tensions, renewed lockdowns in parts of China and high commodity prices pose downside risks to growth prospects, ICRA warned, as companies face squeezed margins that could hurt gross value added (GVA) growth in the economy.

“Moreover, the K-shaped recovery looks likely to continue as the formal sector looks set to gain market share in the coming year,” ICRA chief economist Aditi Nayar said, adding that higher prices for fuel and items like cooking oils are likely to depress disposable income in the middle-to-lower income brackets, limiting demand pickup in 2022-23.

While the extension of free grocery grains under Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) until September 2022 could provide some breather for the grocery budgets of vulnerable households, Ms Nayar said a “normalization of behavior” in the middle-to-high income segments could drive take-up of contact-intensive services that have so far been avoided during the COVID-19 pandemic. This could further restrict demand for goods in the coming year.

The revival of private investment could be delayed due to these headwinds, as industrial capacity utilization is expected to reach only around 74%-75% by the third quarter of 2022-23, compared to around 71%-72% in the current quarter from January to March .

“In ICRA’s view, utilization would need to exceed 75% for broad-scale private sector capacity expansion to occur. The latest data released by the central bank puts capacity utilization at 68.3% for the second quarter of 2021-22,” noted ICRA. New capacity is currently being built in some sectors such as cement, steel and those falling under the production-linked incentive scheme.

While early data for March 2022 is mixed, the Russia-Ukraine conflict and the associated surge in commodity prices have increased uncertainty and expected margin contraction is likely to weigh on GVA growth. ICRA expects real GDP growth to ease to 3%-4% in the current quarter from 5.4% in the previous quarter. GDP growth of 8.5% this year will mean a “slight increase of 1.3%” compared to pre-pandemic levels, the agency said.

An early start of the government’s budgeted investment program remains crucial to boost investment activity in the first half of next year, the agency said. “However, it is worrying that execution risk is shifting to the states, with a significant portion of the increase in the center’s projected capital spending coming from the increase in the interest-free investment loan to state governments to ₹1 lakh crore in 2022-23 from 15,000 crore.” this year,” it said.

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