GDP growth projected to spike to four-quarter high 13.0% in Q1 FY2023: ICRA

Low base of Covid 2.0, robust recovery in contact-intensive services to boost YoY expansion to double-digits
Impact of heatwave on wheat output, geo-political issues and elevated commodity prices on demand/margins to temper pace of growth

ICRA has projected the year-on-year (YoY) growth of the GDP and the gross value added (GVA) at basic prices (at constant 2011-12 prices) in Q1 FY2023 at 13.0% and 12.6%, respectively, a sharp jump from the 4.1% and 3.9%, respectively, recorded in Q4 FY2022. ICRA expects the sectoral growth in Q1 FY2023 to be driven by the services sector (+17-19%; +5.5% in Q4 FY2022), followed by the industry (+9-11%; +1.3%). However, the GVA growth in agriculture, forestry and fishing is projected to decline to ~1.0% in Q1 FY2023 from 4.1% in Q4 FY2022, on account of the adverse impact of the heat wave in several parts of the country, which supressed wheat output.

Aditi Nayar, Chief Economist, ICRA Ltd, remarked, “The anticipated double-digit GDP expansion in Q1 FY2023 benefits from the low base of the second wave of Covid-19 in India in Q1 FY2022 as well as the robust recovery in the contact-intensive sectors following the widening vaccination coverage. In ICRA’s assessment, there has been a shift in demand towards contact-intensive services from discretionary consumer goods for the mid-to-higher income groups. This, in conjunction with the emerging cautiousness in export demand, and the impact of high commodity prices on volumes as well as margins for the industrial sector, are likely to result in a relatively moderate industrial growth. Additionally, the impact of the heat wave on the wheat harvest is expected to result in a low growth of the agricultural sector in Q1 FY2023. Overall, ICRA expects GDP growth in Q1 FY2023 to trail the 16.2% projected by the Monetary Policy Committee (MPC).”

“The recent moderation in commodity prices,” Nayar said, adding, “if sustained, should help to ease inflationary as well as margin pressures and translate into improved demand for discretionary goods and higher value-added growth, respectively. Based on this, ICRA anticipates that GDP growth in Q2 FY2023 may print in the range of 6.5-7.0%, exceeding the MPC’s forecast of 6.2% for that quarter.”

The recovery in travel-related services has been upbeat since the onset of FY2023, benefitting from pent-up demand related to corporate travel and increasing confidence for availing leisure services amid the decline in trajectory of Covid-19 infections. Moreover, within transportation, the railway and road sub-sectors are expected to post a healthy recovery in Q1 FY2023, as indicated by the healthy YoY growth in rail freight and GST e-way bills. Overall, ICRA expects the growth in GVA of trade, hotels, transport, communication and services related to broadcasting (THTCS) to record a base-effect driven expansion of ~40-45% in Q1 FY2023 (+5.3% in Q4 FY2022), while trailing the pre-Covid level of Q1 FY2020 by a muted ~2.5%.

The Government of India’s (GoI’s) non-interest revenue expenditure recorded a mild YoY growth of 3.5% in Q1 FY2023. However, the combined revenue expenditure of the 23 state governments (except Andhra Pradesh, Assam, Goa, Mizoram and Tamil Nadu), for which data is available, posted a considerable YoY expansion of 13.1% in Q1 FY2023. In addition, other services, which include education, healthcare, recreation, and personal services, are likely to have seen a sharp base effect-led jump in this quarter. As a result, ICRA projects the GVA growth of public administration, defence and other services (PADOS) to print at ~14% in Q1 FY2023 (+7.7% in Q4 FY2022).

Notwithstanding the higher YoY volumes displayed by many lead indicators in Q1 FY2023, owing to the low base of Covid 2.0, the spike in global commodity prices, following the escalation of the Russia-Ukraine conflict for a larger part of the quarter, is expected to have compressed demand for discretionary goods as well as the margins of corporates, thereby impacting the value-added growth.

The GoI’s capex, infrastructure/ construction output and new project announcements showed encouraging trends in Q1 FY2023, along with a robust order book position of construction and capital goods companies and the resilience in housing sales, as evinced by stamp duty collections. However, project completions, states’ capex and capital goods’ output were subdued, suggesting that the recovery in investment demand remained uneven.