Icra maintains 7.2% GDP forecast for FY23, sees pick-up in govt expenditure

Citing revival in contact-intensive services and a pick-up in government and private expenditure, rating agency Icra retained its previous growth forecast of 7.2% for the current fiscal

Citing revival in contact-intensive services and a pick-up in government and private expenditure, rating agency Icra on Wednesday retained its previous growth forecast of 7.2 per cent for the current fiscal.

Growth is expected to pick up to pre-Covid levels on the back of pent-up demand, even though on an annualised basis, the absolute numbers will be falling from Q1 (13.5 per cent) to a much lower level in Q2 and further down in the two remainder quarters due to the high base, the agency said.

At 7.2 per cent, the number is marginally higher than most consensus forecast of 7 per cent and 10 bps lower than what S&P forecast earlier this week. The RBI is widely believed to again lower its growth forecast at its September 30 monetary policy review from the previous projection of 7.2 per cent.

"We maintain our GDP forecast of 7.2 per cent for FY2023, aided by a revival in contact-intensive services owing to pent-up demand, and a back-ended pick-up in government and private capex. While the annualised basis growth is expected to slow from Q1 to Q2 and further in H2, this is largely be optical in nature, growth is expected to pick-up compared to pre-Covid levels of FY20, Aditi Nayar, the chief economist at the agency said.

The record generation of average daily GST e-way bills in August, owing to pre-festive stocking, indicates a revival in confidence and this, coupled with softening commodity prices, bodes well for the upcoming festive season. However, the decline in the output of key kharif crops such as paddy and flagging external demand pose risks to growth and remain the key monitorables, she said.

She expects the growth momentum to lose steam and slows down to 6.5-7 per cent in Q2 and further 5-5.5 per cent each in Q3 and Q4 of FY2023 due to base effect, which is still higher the RBI forecast for these two quarters as she foresees a broad-based pick-up in private sector capex beginning from end of 2022, notwithstanding the higher-than-expected capacity utilisation of 74.5 per cent in Q4 FY22.

The agency sees GVA (gross value add) growth 7 per cent and average retail inflation 6.5 per cent and wholesale inflation 10.1 per cent and the current account deficit nearly trebling to USD 120 billion or 3.5 per cent of GDP by March from USD 38.7 billion or 1.2 per cent in FY22.

The latter, along with buoyant imports, following relatively stronger domestic demand, is expected to lead to a sharp widening of the CAD to 3.5 per cent in FY23, she said, adding although some relief is likely.

The worst will be the rupee, which may plunge to 83 to a dollar by December and the 10-year G-sec yields to range 7.3-7.8 per cent in the rest of the year.

Gross fiscal deficit will print in at Rs 15.87 lakh crore or 6.7 per cent of GDP, which will be below the revised estimate of Rs 15.91 lakh crore or 6.9 per cent.

The agency expects the MPC to hike rates by 50 bps on Friday and turn data dependent thereafter, taking a cue from the latest CPI prints and the strength of the Q2 growth.