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GDP growth set to halve to 6.5% in Q2 FY23: Icra

NEW DELHI: India’s economic growth will likely slow down to 6.5% in the second quarter of the current fiscal (Q2FY23), largely because of input cost movements for certain sectors with a higher fuel intensity, as well as the impact of the flagging external demand on non-oil merchandise exports, rating agency Icra Ltd. said on Monday.

For the April-June period, the economy grew at 13.5% from a year ago, fuelled by domestic demand.

“Economic activity in Q2 FY2023 benefitted from robust demand for contact-intensive services, healthy capital spending by the Government of India (GoI) and pre-festive season stocking of goods,” said Aditi Nayar, chief economist, Icra.

Downside risks arose from mixed crop output trends revealed by the advance estimates of kharif production, adverse input cost movements for certain sectors with a higher fuel intensity, as well as the impact of the flagging external demand on non-oil merchandise exports. “On balance, we project the GDP growth in Q2 FY2023 at 6.5%, somewhat higher than the Monetary Policy Committee’s (MPC’s) September 2022 forecast of 6.3% for that quarter,” Nayar said.

Travel-related services have recorded healthy recovery since the onset of FY23. They benefitted from pent-up demand related to corporate travel and increased confidence for availing leisure services amid the decline in trajectory of covid-19 infections.

“As many as nine of the 16 service sectors high frequency indicators reported a double-digit YoY expansion in Q2 FY23. In particular, the combined revenue expenditure (revex) of the 24 state governments for which data is available, posted a considerable YoY growth of 16.7% in Q2 FY23,” Icra said.

In addition, other services, which include education, healthcare, recreation, and other personal services, are likely to have seen a sustained demand in this quarter. However, the Centre’s non-interest revenue expenditure contracted 1.4% in Q2 FY23.

Icra has projected the GVA growth of the services sector at a robust 9.4% in Q2 FY23.

Investment-related indicators such as the output of capital goods, infra/construction goods, aggregate capital outlay of 24 state governments and the gross capital expenditure of the central government displayed a healthy performance in Q2 FY23.

“These states’ aggregate capital outlay rose to Rs. 1.1 trillion in Q2 FY23 from Rs. 0.6 trillion in Q1 FY23, benefitting from the release of a double tranche of the monthly central tax devolution to the states in August 2022. Notwithstanding this, and the ample fiscal space available, state capex in H1 FY23 stood at Rs. 1.7 trillion, half of the Rs. 3.4 trillion incurred by the GoI,” Icra said.

Growth in manufacturing volumes, as indicated by IIP data, in Q2 FY23 was modest at 1.4% relative to the year-ago levels, dragged down by the weak external demand, and subdued domestic demand for consumer durables amid elevated input cost and fuel inflation.

While revenues of listed corporates were favourable in Q2 FY23, tentative volume growth limited their ability to transmit the pain of higher costs into output prices, resulting in a compression of margins by a varied extent across sectors in that quarter.

Icra projects YoY growth in manufacturing GVA to dip to 3% in Q2 FY23 from 4.8% and 5.6%, respectively, in Q1 FY23 and Q2 FY22.

Based on the first advance estimates of crop production, Icra expects agriculture GVA growth at a modest 2.5% for Q2 FY23. Untimely heavy rainfall in states across northwest and central India at the fag end of the monsoon season may have an adverse effect on crop output vis-a-vis estimates.

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