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

Agency cites likely impact on demand revival as incomes get squeezed by high fuel, commodity prices

Rating agency ICRA has slashed its 2022-23 growth forecast for India’s GDP to 7.2% from 8%, citing elevated commodity prices and supply chain challenges arising from the Russia-Ukraine conflict, as well as higher prices of fuels and edible oils denting demand due to squeezed household incomes.

The agency expects growth this year to be 8.5%, lower than the official advance estimate from the National Statistical Office of 8.9%, it said in a note on Tuesday. Protracted geopolitical tensions, the renewed lockdowns in parts of China and high commodity prices pose downside risks to the growth outlook, ICRA warned, with firms facing compressed margins that could hurt the growth of gross value added (GVA) in the economy.  

 “Moreover, the K-shaped recovery appears likely to continue with the formal sector gaining market share in the coming year,” said ICRA chief economist Aditi Nayar, adding that higher prices of fuels and items such as edible oils are likely to compress disposable incomes in the mid to lower income segments, constraining the demand revival in 2022-23.

While the extension of free foodgrains under Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) until September 2022 may offer some respite to the food budgets of vulnerable households, Ms. Nayar said ‘behaviour normalisation’ in the mid- to upper-income segments could drive consumption of contact-intensive services that were avoided during the COVID-19 pandemic so far. This, she said, could further constrain the demand for goods in the coming year.

Private investment revival may get delayed due to these headwinds, as capacity utilisation in industry is likely to reach only about 74%-75% by the third quarter of 2022-23, from around 71%-72% in the current January to March quarter.

“In ICRA’s view, utilisation would need to cross 75% for broad-based capacity expansion to be undertaken by the private sector. The most recent data released by the central bank pegs the capacity utilisation at 68.3% for the second quarter of 2021-22,” ICRA noted. As of now, a few sectors like cement, steel and those covered under the production-linked Incentive scheme are seeing fresh capacity building.

While the early data for March 2022 is mixed, the Russia-Ukraine conflict and the associated surge in commodity prices has heightened uncertainty, and the expected margin compression is likely to squeeze GVA growth. ICRA expects real GDP growth to moderate to 3%-4% in the current quarter, from 5.4% in the previous quarter. An 8.5% GDP growth this year will mark a ‘mild rise of 1.3%’ relative to pre-pandemic levels, the agency said.