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Growth momentum to pick up

The pace of capex can be expected to improve in the second half of the year

Growth momentum to pick up
It was anticipated that the soaring commodity prices, a fallout of the unexpectedly protracted Russia-Ukraine conflict, would whittle away at producers' margins, thereby moderating the value addition in the economy in that period.

The NSO’s initial year-on-year (y-o-y) growth prints for the GDP and the gross value added (GVA) for the first quarter of FY23, of 13.5% and 12.7%, respectively, came in below consensus. However, they were close to ICRA’s estimates of 13.0% and 12.6%, respectively. The underlying growth momentum can be expected to improve meaningfully in the second half of FY23, and therefore there may not be a case for cutting the full year growth projection below the Monetary Policy Committee’s (MPC’s) and ICRA’s projection of 7.2%.

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It was anticipated that the soaring commodity prices, a fallout of the unexpectedly protracted Russia-Ukraine conflict, would whittle away at producers’ margins, thereby moderating the value addition in the economy in that period.

Notwithstanding the geopolitical headwinds, the real GDP and GVA did expand by double-digits in the quarter ending June 2022, benefitting from the low base related to the second wave of Covid-19 in India in the first quarter of FY22, and an uneven revival in consumption. To belabour the impact of the low base, the growth in the GDP and GVA relative to the pre-Covid level of the first quarter of FY20, was quite modest at 3.8% and 4.7%, respectively, in the first quarter of FY23.

Also Read: Moody’s slashes 2022 growth forecast for India to 7.7%

Given the differential timelines of Covid waves in various countries, base effects are particularly devious. Therefore, it is not meaningful to celebrate high y-o-y growth rates relative to other large economies, in quarters such as April-June 2022.

What did drive the high growth? The y-o-y GDP expansion of 13.5% in the first quarter of FY23 was boosted by a growth in excess of 20% in both private final consumption expenditure and gross fixed capital formation.

On the production side, the GVA expanded by 12.7% in the first quarter of FY2023, primarily driven by a base-effect led 17.6% increase in services and an 8.6% rise in industry. The GVA growth of agriculture, forestry and fishing printed at a relatively lower 4.5% in that quarter, which nevertheless seems rather optimistic given the adverse impact of the heatwave on wheat harvest.

With the growth in the first quarter of FY23 meeting ICRA forecasts, the projection of 7.2% for FY23 is maintained. While the monsoon pick-up tempered the economic activity momentum in July 2022, there is a case to remain constructive on the underlying growth momentum improving in the remainder of the year, even though the y-o-y growth prints will most certainly taper off as the base normalises.

Firstly, it can be expected that the demand for contact-intensive services to improve further in the months ahead. The reopening of schools, institutions, etc. has improved the consumption expenditure by households on education, and related items and services such as bus/tram rides, which were constrained during the period of pandemic. This trend is expected to continue in the remainder of FY23, auguring well for generation of incomes of the sections directly/indirectly linked to such sectors. Further, the measures undertaken by the Government of India (GoI) for taming inflation in items such as edible oils, pulses, etc. are positive for consumption demand.

Additionally, the recent correction in global commodity prices from the peaks in mid-June 2022 portends well for business margins, household consumption and investment demand in the remainder of this fiscal.

The capacity utilisation (CU) rose to a three-year high 75.3% in the fourth quarter of FY22, exceeding that crucial threshold 75% that is usually adequate to trigger widespread capacity expansion. In spite of this, project announcements have been circumspect in light of the global uncertainties and shift in domestic demand to services from goods. ICRA expects CU to witness a seasonal dip to ~71-72% in the first quarter of FY23 before rising gradually to ~75-76% by the third quarter of FY23, which would then trigger a broader capacity expansion by the private sector. This would also provide a back-ended fillip to the underlying growth momentum.

While GoI’s capex has risen by a sharp 63% y-o-y during April-July 2022, average monthly capex has trailed the average monthly number required to meet the FY23 budget estimate by 16.5%. The pace of capex can be expected to improve in the second half of the year vis-à-vis the current levels, providing a larger impetus to growth in the second half of FY23.

Amid an uneven distribution of rainfall, the kharif acreage was 1.6% lower than the year ago levels as on August 26, 2022, dragged down by rice. Given the trends in kharif sowing, the agri GVA growth is estimated at ~2.0% each in the second and third quarters of FY23, with eventual yields guiding the farm sentiment amidst modest upticks in MSPs for such crops in the FY23 marketing season. However, the healthy reservoir levels augur well for a timely onset of rabi sowing, although concerns regarding the availability of labour in specific states as well as fertilisers would continue.

However, signs of weakening of external demand have emerged since late-June 2022, with a slowdown in domestic merchandise exports, following the fears of a global recession, the ongoing Russia-Ukraine conflict and fresh uncertainties around the US-China tensions. Any disruption related to an impending global recession, container shortages, and other supply chain bottlenecks would hurt India’s exports and are key monitorables. India’s services exports are expected to remain healthy in FY23, although there is reason for caution regarding the impact of a potential recession in the US and Europe on software exports in the second half of FY23.

The y-o-y GDP growth can be expected to moderate to 6.5-7.0% in the second quarter of FY23 and further to 5-5.5% in the second half of FY23 from the 13.5% recorded in the first quarter of FY23. However, ICRA forecasts are relatively more optimistic than the MPC’s projections of 6.2% and ~4.0% for the second quarter and second half of FY23, respectively. Therefore, there is no urgency to pare the full year growth forecast below 7.2% at this stage.

The author is chief economist, ICRA Limited

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