India Ratings & Research (Ind-Ra) expects Gross Domestic Products (GDP) to grow by 7.6 per cent in the fiscal year 2022-23 (FY23)

“After a gap of two years, the growth will be meaningful,” Sunil Kumar Sinha, Principal Economist with Ind-Ra said in a webinar. Now, all eyes will be on the Economic Survey, which is scheduled to be tabled in the Parliament on January 31 and that will give the government’s estimate for FY23.

The government expects GDP growth in the current fiscal to be 9.2 per cent. According to Ind-Ra, though 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.

Private consumption, investment demand

“A continued weakness in private consumption and investment demand is estimated to contribute 43.4 per cent and 21 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,” the agency said.

It has also listed risks to the ongoing recovery. National Statistical Organisation’s (NSO) advanced estimate (AE) of FY22 shows that private final consumption expenditure (PFCE), which is the largest component of GDP (58.6 per cent) from the demand side and a proxy for consumer demand, grew only 6.9 per cent y-o-y in FY22, 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 Covid-19 pandemic had hit the Indian economy,” it said.

Ind-Ra estimates investments, as measured by gross fixed capital formation (GFCF), to grow 8.7 per cent in FY23. By budgeting the capex at 2.5 per cent of GDP for FY22 and scaling up capex of GDP for FY21 (revised estimate) to 2.3 per cent, the Union government had renewed its focus on reviving growth through capex in the economy.

This is indeed getting reflected in NSO’s AE and accordingly, GFCF is set to grow 15 per cent in FY22 albeit on a low base. However, 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.

Merchandise exports and PLI scheme

“The two developments that can, however, hasten this process are merchandise exports which have shown a surprise turnaround in FY22 and the Production-Linked Incentive (PLI) Scheme announced by the Union government in April 2020. While sustained merchandise exports could translate into higher manufacturing sector capacity utilisation, an effective roll-out of the PLI Scheme could incentivise existing as well as new players to undertake capex,” the agency said.

Talking about the fiscal deficit, Ind-Ra expects fiscal deficit to come in at 5.8-6 per cent of GDP in FY23. Even the RBI, the agency believes, is unlikely to change its either policy rate or policy stance in the near term. The US Fed, however, has indicated that it may increase the federal funds rate three times in 2022.

Against this backdrop, the agency believes interest rates on 10-year G-sec to end FY23 are in the range of 6.7-6.8 per cent, notwithstanding a moderation in the retail and wholesale inflation to 4.8 per cent and 5.7 per cent, respectively, in FY23 due to the base effect.

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