India’s gross value added (GVA) growth at basic prices will record a modest pick up in the third quarter of the current fiscal year, ratings agency ICRA projected in its latest report. The GVA will print at around 6.5 percent in Q3 FY18 before rising sharply to above 7.5 percent in Q4 FY18, according to the report. Although upbeat on other economic indicators, increase in stagnant projects and the latest hike in CPI inflation are the lone dark areas highlighted by the ratings agency. Here’s how ICRA analyses various economic indicators in its latest report.
Manufacturing is likely to display healthy expansion in volumes in Q3 FY 2018, which should result in a substantial improvement in capacity utilisation on a year-on-year basis. Elevated commodity prices, especially fuel prices, are likely to inflate input costs exerting pressure on manufacturing margins and GVA growth for this sector in Q3 FY 2018.
Commitment towards fiscal consolidation at the central and state levels, normal monsoon and efficiency gains related to the GST suggest 50 bps improvement in GVA growth in FY19.
Gross fixed capital formation
Gross fixed capital formation (GFCF) recorded an uptick in growth to 4.7 percent in Q2 FY2018 from 1.6 percent in Q1 FY 2018 in line with turnaround in capital goods output.
Capacity utilisation saw moderation to 71.2 percent in Q1 of FY18 from 74.6 percent in Q4 of FY17, the downturn is unsurprising due to trimming inventories prior to GST.
Projects stalled during Q2 FY18 rose by 2.7 percent on a year-on-year basis to Rs 0.67 lakh crore from Rs 0.65 lakh crore in Q2 FY2017, led by big-ticket projects in the electricity and private steel projects.
However, the ratings agency has quoted some rate hike concerns based on a sharper than expected uptick in the CPI inflation. On the rate hike concern ICRA says, “Given that the MPC responded to this period of transient ‘low’ inflation with only one rate cut of 25 bps in August 2017, we do not expect it to commence hiking rates unless the CPI inflation is forecast to persist above 5.0% for at least two quarters. While elevated commodity prices and the impact of state and central government pay and house rent allowance (HRA) revision would continue to push up inflation, their impact would be counteracted to an extent by the eventual correction in vegetable prices, the pass-through of lower GST rates and the base effect related to the HRA revision for central government employees (after July 2018). ICRA expects the CPI inflation to range between 4.2-5.0% between December 2017 and June 2018. Subsequently, the outlook for the 2018 monsoon would keenly influence the trajectory of food and headline inflation. At present, we maintain our baseline expectation of an extended pause in H1 CY2018.”