GDP growth likely to have skidded to 3.5% in Q4 FY2022: ICRA


ICRA has projected that the year-on-year (YoY) growth of the GDP and gross value added (GVA) at basic prices (at constant 2011-12 prices) in Q4 FY2022 seems to have eased to a tepid 3.5% and 2.7%, respectively, from the performance in Q3 FY2022 (+5.4% and +4.7%, respectively). This is on account of the impact of higher commodity prices on margins, decline in wheat yields and the hiccups in the recovery of the contact-intensive services attributable to the third wave of Covid-19 in India, as well as the high base. Looking ahead, the recent cut in excise duties on petrol and diesel will help boost sentiments and improve consumers’ disposable incomes, while simultaneously cooling the CPI inflation trajectory.

Ms. Aditi Nayar, Chief Economist, ICRA Ltd said: “Q4 FY2022 was a challenging quarter, with the Omicron-fuelled third wave of Covid-19 arresting the momentum in contact-intensive services, and a pervasive pressure on margins from higher commodity prices. Moreover, the heat wave has adversely affected wheat output in March 2022. We are apprehensive that both agriculture and industry will post a sub-1% GVA growth in Q4 FY2022, whereas services growth will print at around 5.4%”. The GVA growth in services, industry and agriculture, forestry and fishing was estimated by the NSO at 8.2%, 0.2% and 2.6%, respectively, for Q3 FY2022.

We are enthused by the recent excise duty cut on petrol and diesel, which has been complemented by VAT cuts by some states. This will bolster sentiment and create some cushion within stretched household budgets to undertake non-essential spending. Moreover, the downshift in the inflation trajectory for the remainder of FY2023 has pared the likelihood of sharply front-loaded monetary tightening”, Ms. Nayar addedICRA projects the average CPI inflation for FY2023 at 6.5%, pencilling in a 40 bps repo hike in the June 2022 Policy review, amidst a terminal rate of 5.5%.

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For the 19 state governments for which data is available, revenue expenditure growth rose to 13.4% in Q4 FY2022 from 11.8% in Q3 FY2022. However, given the back-ended spending in March 2021, the GoI’s non-interest revenue expenditure is likely to have contracted in Q4 FY2022, even after accounting for the third supplementary demand for grants. Based on this, ICRA projects the GVA growth of public administration, defence and other services to decline, albeit to a healthy ~10.0% in Q4 FY2022 from 16.8% in Q3 FY2022.

The nascent recovery in the contact-intensive services, following the widening vaccination coverage, was halted by the restrictions related to the third wave of Covid-19 in India in Jan-Feb 2022. Accordingly, ICRA projects a halving in the growth of trade, hotels, transport, communication and services related to broadcasting (THTCS) to ~3% in Q4 FY2022 from 6.1% in Q3 FY2022. However, with a pick-up in bank credit growth and bond issuance amidst lower bank deposit growth and FII outflows, ICRA expects the GVA growth of financial, real estate and professional services to have risen somewhat to ~5% in Q4 FY2022 from 4.6% in Q3 FY2022.

While the industrial sector witnessed a limited impact of the third wave in the first half of the quarter, the manufacturing volume growth remained subdued in Q4 FY2022. However, with the Russia-Ukraine conflict and renewed lockdowns in China in March 2022 leading to a spike in global commodity prices, ICRA expects a marginal value-added growth of the industrial sector in Q4 FY2022, dampened by manufacturing and construction. 

The 3rd Advance Estimate (AE) of crop production, released by the Ministry of Agriculture and Farmers Welfare on May 19, 2022, indicate a mixed trend in the production of rabi crops relative to the Final Estimates for FY2021. While the output of pulses (+15.8%), oilseeds (+12.8%) and coarse cereals (+3.4%) is expected to have risen in FY2022, the output of wheat (-2.9%) and rice (-2.8%) is expected to have trailed the FY2021 levels. “Given the dominance of wheat in rabi output, ICRA expects the growth of GVA of agriculture, forestry and fishing GVA to be muted at sub-1% in Q4 FY2022 (+2.8% in Q4 FY2021), lower than the 2.6% in Q3 FY2022 (+4.1% in Q3 FY2021),” Ms. Nayar said.